Descending Triangle Pattern - How to Use It in Trading
By Stelian Olar, Updated on: Feb 07 2024.
Imagine you're hiking down a mountain trail that keeps angling downward at a steady slope. The path keeps narrowing as you descend until you reach a tight apex. You've suddenly found yourself in a triangular-shaped valley with no clear exit — this is known in stock charting as the descending triangle pattern.
Just like feeling squeezed into that mountain valley, the descending triangle on a stock chart shows a downtrend being compressed between two converging lines. The stock makes lower highs against a flat support level, forming the shape of a downward-pointing triangle.
In this beginner's guide, we'll explore everything you need to know about this common chart pattern into simple, easy-to-understand terms.
No fancy finance degree required!
I'll explain how to identify the triangle descending, how to interpret it from other types of triangles as a potential trend reversal signal, and how to take advantage of this pattern in your trades.
Whether you're a new investor or a seasoned chart pattern pro, this article will break down the intricacies of the descending triangle meaning. You'll learn how this shape often foreshadows a bearish breakout, but sometimes instead acts as a trend reversal sign for an upside breakout.
Once you understand this formation, you can spot trading opportunities and better time your entries and exits.
So let's get started understanding this important chart formation - the descending triangle stock pattern.
What is a Descending Triangle Pattern in Trading
A descending triangle is a bearish triangle chart pattern that is defined by a downward sloping resistance line and a horizontal support level. As the stock makes a series of lower highs, it will bounce between these two converging trend lines, forming the shape of a triangle tilted down.
In technical analysis, triangles are considered reversal patterns because it often signals a shift from an uptrend to a downtrend. The descending resistance line shows waning momentum as buyers lose interest and demand weakens.
To spot this formation, watch for the stock hitting its head on the downward-sloping trend line as sellers step in at those higher levels. Meanwhile, buyers keep emerging to defend the support level as it makes lower highs.
The compression continues resembling a falling triangle until finally breaking down or breaking out.
Is a Descending Triangle Bullish or Bearish?
Since the descending triangle is a bearish triangle pattern, it may seem counterintuitive, but this formation can actually produce bullish outcomes in certain situations.
In general, descending triangles are considered bearish patterns and part of a downtrend acting as a continuation pattern.
A descending triangle after uptrend acts more as a trend reversal signal as sellers have taking control and pushing the price lower making it less likely for the trend continues moving upwards.
However, if the descending triangle occurs after a downtrend, it may mark a bearish-to-bullish trend reversal, but it’s in the middle of a downtrend, trend continues downward is more likely.
So in summary:
- Descending triangle in an uptrend = bearish trend reversal
- Descending triangle after downtrend = potential descending triangle bullish reversal
- In the middle of a downtrend = trend continuation
The previous trend is key to determining whether the triangle is a bullish descending triangle or is a descending triangle downtrend.
Use the context to gauge the most probable direction.
How to Identify a Descending Triangle
Let’s walk through the key characteristics to look for when identifying a chart pattern descending triangle on a stock chart.
The main thing you want to spot is the distinct downward triangle shape formed by the two converging trend lines:
- A downward-sloping upper trendline showing the lower highs
- A horizontal lower trendline at the support level showing equal lows
As the stock hits resistance at the upper trendline, buyers emerge at the support level and lift the price back up. This forms the pattern of lower highs and equal lows until the falling triangle pattern apex.
Watch for periods of contraction with smaller trading ranges, signaling a potential descending triangle breakout.
Descending Triangle vs. Falling Wedge - Know the Difference
It’s important to distinguish between a descending triangle and other similar looking chart patterns. The falling wedge in particular has some visual similarities but different implications. You can view the falling wedge similarly to a descending expanding triangle or a descending broadening triangle.
It even looks similar to a bigger descending flag pattern.
Like the descending triangle candlestick pattern, the falling wedge has a downward sloping upper trendline but the lower trendline on a falling wedge slopes downwards too.
This forms a cone-shaped pattern rather than a triangle.
Here is a side-by-side comparison of the descending triangle versus the falling wedge:
- Formed by a downward-sloping resistance line and a horizontal support line
- Formed by two downward-sloping trendlines
- Shows decreasing buying pressure through lower highs
- Shows decreasing selling pressure through lower lows
- Considered a bearish pattern and continuation pattern
- Often leads to a bearish breakdown below support
- Often leads to a bullish breakout above resistance
- Volume declines as pattern develops
- Volume increases on breakout
- Breakout usually occurs 2/3 way through pattern
- Breakout usually occurs 3/4 way through pattern
Ascending vs. Descending Triangle Pattern
It's also useful to compare the descending triangle to its opposite counterpart - the ascending triangle pattern. Let's look at the key differences between these two symmetrical triangle formations.
The ascending triangle has a horizontal resistance line and an upward-sloping support line that converges. It is considered a bullish continuation pattern, unlike the bearish descending triangle.
An easy way to remember the difference between ascending vs descending triangle pattern:
- Ascending triangle - bullish with rising support
- Descending triangle - bearish with a falling resistance
The slope of the bottom trendline indicates the likely breakout direction. Ascending predicts an upside breakout, while descending signals a potential downside breakout.
Both are potential reversal patterns if they form after a trend in the opposite direction. Use the previous trend context to determine if the descending symmetrical triangle is setting up for continuation or reversal.
In summary, the mirror image shapes provide early clues on where the stock may head next. Analyze the trendline slopes and prior trend to better anticipate and trade the eventual breakout.
Descending Triangle Pattern - Advantages and Disadvantages
The descending triangle, like any chart pattern, has both pros and cons for traders to consider. Let’s examine the potential advantages and disadvantages of trading this triangle chart pattern.
- Provides early warning of potential trend reversal or trend continuation
- Clear parameters with defined support and resistance levels
- Relatively easy to identify on the chart
- Descending triangle pattern breakout often signals start of a new trend
- Breakout timing is uncertain (could take weeks)
- Whipsaws are possible with false breakouts
- Limited profit potential compared to other patterns
- Performs better in short term time frames
The descending triangle chart is best applied by savvy traders in conjunction with other analysis like volume, momentum oscillators, and support/resistance levels. While not a flawless pattern, it does offer perceptive clues into a stock’s future direction.
Now let’s move on to discussing execution...
How to Trade a Descending Triangle Pattern
Here is a detailed guide on how to trade a descending triangle pattern:
Step #1: Look for a Series of Lower Highs
The upper trendline connects at least 2 lower highs as the price makes lower peaks on successive rallies which indicate the bears are gaining control.
At the same time, the lower trendline is horizontal and connects an area of support where the price is bouncing. The multiple touches confirm the support level.
Volume on each successive lower peak should diminish showing waning interest from buyers as the price drops.
Step #2: Descending Triangle Continuation Pattern
If the descending triangle forms in a downtrend, it signals a potential continuation of the downtrend.
Here is how to trade it:
- Place a short trade when the price breaks below support with increased volume.
- Set a stop loss above the horizontal support level.
- Target a price move below support equal to the height of the triangle pattern.
Step #3: Descending Triangle Pattern Reversal
If the descending triangle forms at the end of an uptrend, it can mark a trend reversal.
Here is how to trade it:
- Go short when the price breaks support or wait for a close below support.
- Set a stop loss above the upper trendline of the triangle.
- Target a move down equal to the height of the pattern.
Step #4: Use Risk Management
- Determine the appropriate position size using a risk percentage of your trading account.
- Use a stop loss when entering trades to define and limit risk.
- Calculate a reward-to-risk ratio of at least 2:1 when setting the profit target.
Step #5: Descending Triangle Outcomes
The descending triangle continuation pattern has a higher probability of success. Some key stats:
- Probability of Breakout: descending triangle probability of success is over 70% chance of a breakout in the direction of the trend.
- Descending Triangle Price Target: The height of the pattern projecting downward from the support break.
- Failure Rate: 20-25% of the time the pattern fails and price breaks upward.
By mastering the descending triangle formation, traders can take advantage of high-probability continuation and reversal trade setups. The key is staying patient for the validated breakout, and then quickly capitalizing on the potential new trend.
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