A descending triangle is a standout chart pattern in technical analysis created by drawing one trend line connecting a series of lower highs and a second horizontal trend line connecting a series of lows.
A regular descending triangle pattern is commonly seen as a bearish chart pattern or a continuation pattern within an established downtrend. However, this pattern can occasionally be bullish, suggesting a reversal with a breakout in the opposite direction.
Key Takeaways
- A descending triangle signals traders to take a short position to accelerate a breakdown.
- It is detectable by trend lines drawn for the highs and lows on a chart.
- It is the counterpart to an ascending triangle, another trend line-based chart pattern used by technical analysts.
What Does a Descending Triangle Tell You?
As a popular chart pattern used by traders, descending triangles clearly illustrate weakening demand for an asset, derivative, or commodity. When the price breaks below the lower support, it indicates ongoing downward momentum.
Technical traders have the opportunity to make substantial profits over short periods. They closely monitor movements below the lower support trend line, indicating that downward momentum is building and a breakdown is imminent. Traders often enter short positions to further push the asset’s price down.
How to Identify a Descending Triangle
(This illustration showcases the classic descending triangle pattern.)
A descending triangle pattern has the following features:
- An existing downtrend prior to the appearance of the descending triangle.
- A descending upper trendline drawn by connecting upper points, indicating sellers are pushing prices downward.
- The lower horizontal trendline acts as support until the breakout occurs.
- The downtrend usually continues after the breakout, becoming evident below the lower trendline.
How to Trade a Descending Triangle
Traders often initiate a short position following a high-volume breakdown from lower trend line support in a descending triangle.
Generally, the price target for this chart pattern equals the entry price minus the vertical height between the two trend lines at the point of breakdown. The upper trend line resistance also serves as a stop-loss level to limit potential losses.
Descending Triangle Pattern Breakout Strategy
This strategy anticipates a breakout and uses a combination of trading volumes and trend assertion to capture short-term profits. Traders watch for lower highs and lower lows to form within a downtrend or consolidation phase.
Descending Triangles With Heikin-Ashi Charts
Heikin-Ashi charts apply to any market and are used alongside technical analysis for trend identification. In this strategy, traders observe for bullish trends using Heikin-Ashi candlesticks before the breakout.
Descending Triangle With Moving Averages
Traders combine price techniques, like moving averages, with chart patterns and technical indicators in this strategy. The descending triangle pattern is leveraged to anticipate potential breakouts, while moving average indicators signal trade initiation.
Descending Triangle Reversal Pattern—Top
This pattern emerges when volume declines and new stock price highs are limited, indicating that the bullish phase is ending. Trading begins as the reversal pattern reveals itself ahead of a breakout.
Descending Triangle Reversal Pattern—Bottom
At the bottom end of a downtrend, the descending triangle reversal pattern signifies a price action stall with a horizontal support marking a bottom. Should the price break to the upside, traders might opt for long positions.
Descending Triangles vs. Ascending Triangles
Both patterns are continuation patterns featuring different trend line configurations. The descending triangle has a horizontal lower trend line and a descending upper trend line, while the ascending triangle has a horizontal upper trend line and a rising lower trend line.
Triangles indicate opportunity zones for shorting or going long, each suggesting potential profit targets.
The Limitations of a Descending Triangle
No chart pattern is infallible and technical analysis is sometimes subjective. Descending triangles have limitations, such as the risk of false breakdowns and the necessity to redraw trend lines if price action changes. Frequent touches on support and resistance levels add reliability to the pattern.
Bottom Line
The descending triangle is an invaluable chart pattern used in technical analysis. Typically forming at the end of a downtrend, it can also manifest as a consolidation pattern in an uptrend. Generally seen as a bearish chart pattern, it offers potential breakouts in both directions.
Related Terms: Ascending Triangle, Continuation Pattern, Breakout, Breakdown, Moving Averages, Heikin-Ashi.
