Descending Triangle: What Is It? Importance, How to Trade

The take-profit target equals the size of the triangle’s largest part and is measured from the breakout trendline. Risks include false breakouts and the impact of high market volatility, which can lead to more false signals and potential losses. The descending triangle, often referred to as the ‘falling triangle’, has an inherent measuring technique that can be applied to the pattern to gauge likely take profit targets.

  1. The pattern completes itself when price breaks out of the triangle in the direction of the overall trend.
  2. Notice that prior to the break out, the moving averages signal a crossover buy.
  3. Although both signals are used by traders when predicting a trend direction, the continuation signal is primary.
  4. In the world of pattern trading, support lines that break turn into resistance lines and vice versa.

This pattern is characterized by a lower horizontal trendline and a descending upper trendline, forming the shape of a right-angled triangle tilted to the left. A descending triangle is bearish in a bear market amid a price downturn. It can be bullish or bearish when created in an upswing during a bull market, leading to a trend reversal or continuation.

How to Trade with a Descending Triangle Pattern in the Stock Market?

This strategy helps reduce the cost of the trade but also limits the profit potential. Consider purchasing put options on the underlying asset after the breakout, providing a way to profit from the anticipated downward move while limiting risk to the premium paid. Place a stop-loss order above the breakout point to protect against false breakouts.

As of today, September 9th, 2022, the stock is trading at $74.45 per share. Some traders also use the support retest point as a second entry for their trades. The falling triangle has advantages and disadvantages that may affect your trades. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Additionally, market context and external factors should be considered to avoid potential market manipulation and unexpected price movements.

What is a descending triangle pattern?

Prices on the upper trendline continue to fall, resulting in a triangular formation that is getting smaller until the lower trendline’s level of support is broken. Traders should be on the lookout for a potential breakout through the support level as the price is consolidating with a bearish bias. Measure the distance from the horizontal support to the initial high and project this distance from the breakout level. Once you have identified this price action, the next step is to draw or chart the descending triangle pattern. As the name suggests, the descending triangle pattern breakout strategy is very simple. It involves an anticipation of a breakout from the descending triangle pattern.

The descending triangle has a built-in measurement method that is used to analyze the pattern to determine possible take-profit levels. Traders can calculate the length of the descending triangle by measuring the angle between the pattern’s highest point and the flat support line. You can later reverse the same distance, starting from the breakout point and ending at the probable take-profit level. A descending triangle pattern often takes weeks to produce, even on an hourly time scale. Traders should follow the stock over a medium-term timeframe on an hourly or daily chart and be ready to enter at any time to maximize possible profits.

Traders anticipate the market to continue in the direction of the larger trend and develop trading setups accordingly. The descending triangle pattern is used in this trading method to predict probable breakouts. The purpose of the moving average indicators is to serve as a signal to start a trade. The theory is that despite the short-term stability, sellers still force the price below the support level due to their strength. Typically, the breakout from a descending triangle is triggered to the downside.

As mentioned before, this pattern typically occurs as a part of a downtrend continuation pattern. However, unlike symmetrical triangles, DT is naturally bearish, meaning the trend isn’t as important as the pattern itself. The triangle formation consists of two trendlines, a horizontal lower strategies for tax planning line, which connects swing lows, and a falling upper line which goes through declining swing highs. As a descending triangle pattern develops, volume usually contracts. An ideal validation of the pattern occurs when there’s a downside break with an expansion of volume for confirmation.

Traders should exercise caution and wait for confirmation, such as a sustained move below the trendline with increased volume, before entering trades. Enter a short trade when the price shows a clear rejection at the retest level, with a stop-loss order placed above the resistance level. Several tools can assist traders in identifying Descending Triangles. Charting software packages often include pattern recognition tools that help identify such patterns. Descending triangles have the benefit of being able to appear at any time. For instance, the triangle is present on a daily chart for more than a week or even for several months, although it is often seen on an hourly chart for only a few days.

Mean Reversion Definition Reversion to the mean, or “mean reversion,” is just another way of describing a move in stock prices back to an average. Projections and target price level methods remains the same as outlined in the initial strategy. The same concept of measuring the distance from the support to the first high is used to determine targets. This is then projected to the upside for the minimum price objective.

The pattern’s validity relies on factors such as an established trend, certain properties of the lower horizontal and upper descending trend lines, duration, and volume behavior. We should expect a potential downward breakout if the price repeatedly bounces off the support level while making lower highs. The price must move a minimum amount before the breakout from the initial high.

How to Trade the Descending Triangle

The horizontal support level holds the declines where the bounce off the support level leads to lower highs. Traders and intraday speculators can also combine price action techniques and chart patterns with technical indicators. Moving averages are one of the oldest and simplest of technical indicators to work with. A breakout of the descending trendline can, in some cases, create a bullish signal. This triangle is typically a bearish pattern that develops during a downtrend. A take-profit level would equal the widest part of the setup and is measured from the lower trendline (2).

Recognizing a Descending Triangle in Market Trends

Patterns are essential for traders looking to identify trends and forecast future events to trade more successfully and profitably. The psychology behind the pattern is that sellers try to pull the price down, but fail due to a strong support level, so the price rebounds. That is, the price bounces back and forth within a triangle between the two trendlines.

The time frame of the chart is irrelevant as you can use this strategy across any time period. Once you have identified a stock and the time frame, wait for price action to contract. Like with any strategy, you can use the descending triangle pattern to buy/sell stocks by knowing when to enter, take profits, and cut your losses. As we mentioned above, the simplest way to use this pattern is to buy the breakout of the triangle.

Subtract the height from the breakout point to determine the target. Take profits when the price reaches the target or consider trailing the stop-loss to capture additional gains. False breakouts are situations where the price appears to break out from the pattern but then swiftly reverses direction.