Another name for a falling window in technical analysis is a gap. This is a place on a chart where the price has literally ‘gapped’ over an area on the chart. This often happens in FX over the weekend and in stocks when they open after an out-of-hours earnings report.

The falling window is when the price opens to the downside. The most important part of the ‘window’ is the upper bound.

Imagine a stock closes on Day 1 at $10, but then opens on Day 2 at $8.75. In this example, the falling window occurs as the price opens at $8.50, significantly lower than the previous day’s close of $10.00. The gap between the close of the previous day and the open of the current day forms the falling window pattern. Investors may view the area between $10.00 and $8.50 as a resistance level.

If the price retraces back to the $8.50 level, investors who faded the gap might take profits, and fresh sellers could use that area to initiate new short positions. However, if the price manages to break above $10.00 and close the gap, it could indicate a potential reversal or change in market dynamics.

It’s important to note that technical analysis is subjective and relies on patterns, trends, and indicators. Investors often use falling windows in conjunction with other tools and strategies to make informed decisions. In particular, it can enhance the pattern if there is a fundamental reason for the pattern that has formed.

See below for an example of a falling window marked on the chart from the stock Dollar General when it opened after some disappointing earnings before the market open.