A Descending triangle chart pattern is a continuation pattern that reflects the resumption of an ongoing downtrend or a consolidation phase within an uptrend. This pattern is recognized by a series of lower highs and equal lows.
Traders use Descending triangle patterns to create short positions, selling the breakout of the pattern. The counterpart pattern is an Ascending triangle, which we have already discussed in an earlier post.
How to identify a Descending Triangle chart pattern?
Identifying a Descending triangle pattern is quite simple. You’ll need to spot at least two equal lows and two lower highs. Connecting the equal lows creates a horizontal support trend line, while drawing a line through the lower highs forms a downward-sloping resistance trend line. The image below demonstrates this.
Although pattern recognition may appear straightforward, there are a few extra factors to consider when identifying a valid pattern, as discussed below.
There should be an existing downtrend. As a Descending triangle pattern is a continuation pattern with a bearish bias, an established downtrend should pre-exist. However, because the Descending Triangle is a bearish pattern, the length and duration of the trend are less important than the robustness of the formation.
Lower horizontal line. A minimum of two equal lows is necessary to create the lower horizontal line. The lows don’t have to be exact but should be reasonably close. There should be some distance separating the lows with a reaction high between them.
Upper descending trend line- To draw the upper descending trend line, a minimum of two lower highs are required. These reaction highs should be successively lower, and there should be some distance between the highs. If a more recent reaction high equals or exceeds the previous reaction high, then the Descending Triangle pattern becomes invalid.
Pattern duration. The length of the pattern can range from a few weeks to many months, with the average pattern lasting from one to three months.
Volume: As the pattern develops, volume usually contracts. But when the downside break occurs, ideally, there should be a volume expansion to confirm the pattern. Confirmation of volume isn’t necessary, though traders prefer it.
Psychology behind the Descending triangle chart pattern-
The chart patterns reflect the psychology of market participants: the buyers and the sellers. A flat trend line through the equal lows suggests buyers are trying hard to stop the ensuing downtrend and can repeatedly push the price from the support area. However, a falling higher high after each swing suggests sellers are gradually pulling things in their favour swing after swing. A downside breakout from the lower trend line finally suggests the bears have won the battle.
How to trade a Descending Triangle chart pattern?
Descending triangles suggest a downward price move. Traders use this pattern to open short positions. Wait for the price to close clearly below the support line (the lower trend line) before trading. This should ideally happen with a higher-than-average volume. This reduces the risk of a false signal.
Don’t enter the trade when the pattern is still in the making.
Aggressive traders may enter a short position immediately after the breakout, while conservative traders should wait for a pullback (retest) to the broken support, which then acts as resistance. While aggressive entry has the advantage of providing an early entry, it comes with the disadvantages of more failed trades and a smaller risk to reward ratio.
Conservative entry enhances the probability of a successful trade, but sometimes the price doesn’t pull back and continues downward. This increases the chances of missing a trade opportunity.
Once you have entered the trade, the next step is to place logical stop-loss and profit target levels.
Depending on your risk tolerance, you can place a stop-loss just above the retest high or above the descending trend line.
The measured move technique helps estimate the minimum profit target. This involves calculating the triangle’s vertical height at its widest point and projecting that distance downward from the breakout level.
If the price cannot sustain below support and bounces back into the pattern, it may indicate a false breakout, in which case traders should exit the trade promptly.
The image below shows how to trade the Descending triangle pattern.
To improve the reliability of the setup, combine the descending triangle with other technical indicators. Higher-than-average volume accompanying a breakout makes it more credible.
Momentum indicators such as the RSI can strengthen the bearish case if they remain below 50 or show bearish divergence before the breakdown. Traders also look for confirmation from trend-following indicators such as moving averages or the MACD, ensuring that the broader market trend aligns with the bearish breakout. Using multiple confirmations can significantly reduce the probability of trading false breakouts.
How Reliable Is the Descending Triangle Pattern?
The Descending Triangle chart pattern has moderate reliability, and traders shouldn’t use it alone. Historical data reveals it can break out in either direction, with downward breakouts reaching targets approximately 50% of the time, and a significant rate of false signals occurs.
Its reliability increases when it aligns with the overall trend, exhibits clear lower highs, and shows strong volume on a break of support. A breakdown followed by a retest provides further confirmation. Ultimately, consider it a probability-based setup that relies on context and confirmation.
Summing it up
The Descending Triangle pattern is a bearish chart pattern formed by lower highs and relatively equal lows, usually during a downtrend. It reflects weakening buying pressure and often signals a potential continuation of the decline.
To spot a descending triangle on a chart, look for at least two relatively equal lows forming horizontal support and two or more successively lower highs forming descending resistance. Volume generally contracts during formation and may expand on a bearish breakout.
To trade this pattern, wait for a clear close below support, preferably with increased volume, before entering a short trade. Aggressive traders may enter on the breakdown, while conservative traders can wait for a retest; place the stop-loss above the retest high or descending trend line and use the measured move for the target.
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