A popular chart pattern used by traders for technical analysis, a descending triangle is characterised by one trend line that strings together a chain of lower highs along with a second horizontal trend line that links a chain of lows.
Generally, a regular descending triangle pattern is viewed as a bearish chart pattern or a continuation pattern with a downward movement. However, it could be bullish in case of a reversal pattern which basically signals a breakout in the opposite trajectory.
What does a descending triangle indicate?
Primarily, descending triangles reflect that the demand for an asset, commodity, or derivative contract is diminishing. Any price breaks below the lower support level suggest a persistence of the downward momentum. Descending triangles are leveraged by traders to make profits in a short span of time. Technical traders keep monitoring the markets for a move below the lower support trend line, which clearly indicates a downtrend, leading to an inevitable breakdown. Frequently, traders will take short positions to further drive down the price of an asset.
How to identify a descending triangle?
To recognise a descending triangle, look for the following characteristics:
- A downtrend emerges before the descending triangle pattern appears.
- A descending upper trendline can be made by linking the upper points, implying that the sellers are attempting to lower the prices.
- Until the breakout occurs, a lower horizontal trendline acts as a support.
- The downtrend continues post-breakout and is observed below the lower trendline.
What are different strategies to trade a descending triangle?
It is common for traders to enter into a short position after a significant volume breakdown results from the lower support trendline of a descending triangle. In most scenarios, traders pick the easiest strategies to capitalise on the descending triangle chart pattern and purchase the breakout of the triangle. It is one of the many manoeuvres for gaining profits using this technical mechanism.
Here are some of the popular descending triangle trading strategies.
- Descending triangle pattern breakout strategy: By predicting a breakout from the descending triangle chart pattern, this strategy combines factors like trading volumes and assertion of a trend to make profits in a short time. Traders keep an eye out for lower highs and lower lows taking shape when a stock is exhibiting a downtrend pattern or is at a consolidation stage.
- Descending triangles with Heikin-Ashi charts: Applicable to any market type, Heikin-Ashi charts are trading tools that are used with technical analysis to spot trends. The Heikin-Ashi candlesticks are bullish prior to the breakout. The traders track the descending triangle pattern to materialise and anticipate the onset of a bullish trend before utilising the Heikin-Ashi charts.
- Descending triangle with moving averages: With this strategy, traders use a blend of price techniques, including the moving average alongside chart patterns with other indicators. Here, the traders make use of descending triangle patterns to forecast any possible breakouts while the moving average indicators set off the cue to enter a trade.
- Descending triangle reversal pattern—top: When there is a decrease in volume and new stock price highs are limited, this descending triangle chart pattern appears. It signals the conclusion of a bullish phase. The unveiling of a reversal pattern before the breakout calls for the inception of trading periods.
- Descending triangle reversal pattern—bottom: When the price action stalls with a horizontal support level delineating the bottom, a descending triangle reversal pattern is established at the bottom end of the downward trend. Traders could opt for long positions if the prices move along an upward trajectory from the reversal pattern at the bottom
Ascending or descending triangle: Which is better?
Varieties of continuation patterns, both ascending and descending triangles, uncover prospects to short and recommend profile targets but with unique approaches. An ascending triangle is created during an uptrend featuring a horizontal trend line on the highs and a soaring trend line on the lows. Mostly considered to be bullish, ascending triangles can also emerge during the reversal of a downtrend. Alternatively, a descending triangle comes into existence when there’s a downtrend, showcasing a horizontal lower trend line and a declining upper trend line.
Additional Read: What is Williams %R Indicator
Which measuring technique is used for descending triangles?
The inherent measuring technique of a descending triangle can be applied to the chart pattern to estimate potential take profit targets. Traders can measure the distance from the beginning of the pattern located at the highest point of such a triangle to the flat support line. At a later stage, from the breakout point, the same distance could be transposed to arrive at the anticipated take-profit level.
What are the benefits of a descending triangle?
- Lucid indication of bearish trends: With a distinctive pattern showing off a dipping trendline and horizontal support line, descending triangles clearly suggest the initiation of a bearish market.
- Predictive power: When used with additional technical indicators or chart patterns, descending triangles can help predict price movements.
- Precise entry and exit points: Breakout below the support line can be used by traders as an objective entry point to take short positions. Likewise, during a downward breakout, traders can project a potential share price decrease by measuring the triangle’s height at its widest point and subtracting this value from the breakout point.
- Risk-reward ratio: Risk can be handled seamlessly by setting the stop-loss order above the breakout point, enabling traders to achieve attractive risk-reward ratios.
- Relevance: From intraday trading charts to long-term charts, descending triangle patterns can be observed on several timeframes. This renders flexibility for all kinds of traders, irrespective of the trading strategy adopted.
Additional Read: What is a Super Trend Indicator
What are the drawbacks of a descending triangle
- False breakouts: Initially, a share price might break below the lower trendline, hinting at a bearish movement, but then could instantly reverse. An impulsive move on the trader’s end could result in some serious losses.
- Uncontrollable factors: Certain external events, including economic upheavals, organisation announcements/news, or changes in policies, could affect the pattern by triggering price movements that discount the descending triangle’s predictive prowess.
- Biased interpretations: Drawing trendlines is a subjective exercise leading different traders to differently interpret a pattern’s formation and its potential breakouts.
- Upward breakouts: While rare, upward breakouts disprove the anticipated bearish movement. In such cases, traders have to switch to other technical indicators and tools to enter positions.
- Sideways movement: At times, the stock price could just move sideways in a descending triangle. This lack of an explicit breakout can make it tricky for traders to plan their next move to gain profits.
Closing thoughts
The descending triangle can be a productive technical analysis tool to streamline your intraday trades. While it is commonly deemed to be a bearish chart pattern, descending triangles turn bullish when there’s a breakout in the opposite direction. i.e., a reversal pattern. You can make the most of this versatile continuation pattern by using it in conjunction with other technical resources and capture even more reliable trading insights.
