The triangle formation consists of two trendlines, a horizontal lower line, which connects swing lows, and a falling upper line which goes through declining swing highs. A descending or falling triangle is a bearish formation that is formed in up and downtrends. Thus, it signals a trend reversal if it appears in an uptrend and a trend continuation if it’s in a downtrend. Although both signals are used by traders when predicting a trend direction, the continuation signal is primary. It is important to note that when trying to anticipate a potential breakout, we want to also look at other technical indicators.
The sellers, who are in control of the price action, take a temporary pause to consolidate their most recent gains before extending the downtrend lower. Many other trading strategies can blend well with the descending triangle chart pattern. It fits perfectly well within an investor’s buy and hold strategy. The triangle pattern also works with technical analysis which can complement the fundamental analysis as well. However, this textbook pattern seldom occurs in the real markets. In most cases, a descending triangle pattern can also see a sloping base as well.
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Personally, I prefer to trade the continuation patterns (bullish for ascending triangles, bearish for descending triangles). In my opinion, trading the continuations (not the reversals) results in higher success rates and larger profit potential. The descending triangle chart pattern is considered a reliable continuation or reversal point in the market, with an 87% success rate on an upward breakout in bull markets.
- Firstly, risk management is crucial, as with any other trading strategy.
- Another advantage is that it produces a clear target to the downside, which one can aim at once the price action breaks lower.
- At the bottom, there is a solid floor of support that is tested at least 3-4 times.
Alongside the shelter metal, many other commodities and therefore the main indexes at Wall Street were also down, like Dow Jones, S&P 500, and NASDAQ. Very useful information and have often seen that but never known how to enter or exit it. If you want to capture a swing (or one move) in the market, then the price project technique makes sense. You can use the price projection technique and decide whether it’s “too late” to enter a trade, or not.
How to Trade the Descending Triangle Pattern
If both lines were extended right, the descending trend line could act as the hypotenuse of a right triangle. If a perpendicular line were drawn extending up from the left end of the horizontal line, a right triangle would form. Let’s examine each individual part of the pattern and then look at an example. We don’t care what your motivation is to get training in the stock market. If it’s money and wealth for material things, money to travel and build memories, or paying for your child’s education, it’s all good. We know that you’ll walk away from a stronger, more confident, and street-wise trader.
Additionally, traders can easily identify and measure the risk/reward ratio of their trade. Descending triangles also help to reduce emotion from trading decisions by creating clear entry and exit points. The descending triangle often forms within an existing uptrend in a bull market. This is usually a sign of strength and often results in the continuation of the uptrend.
What the Descending Triangle Indicates
WallStreetZen does not bear any responsibility for any losses or damage that may occur as a result of reliance on this data. As previously mentioned, the formation requires at least two highs and two lows. Not only that, you need to identify increasingly lower highs along with relatively consistent lows. Said another way, charting pattern identification is often the result of experience – the more you trade, the better you become at identifying patterns. Over time, your ability to discern where the line should be placed will improve through repetition. This technique is adopted from Classical Technical Analysis where a chart pattern is completed after moving X amount in your favor.
Note that a volume indicator was added on the lower panel of the chart – we will explain why shortly. Traders who follow technical patterns will in most cases include indicators to assist them with their trading decisions. The lower highs indicate more sellers are gradually entering the market as they are willing to accept a lower price in order to establish a short position. The upper trendline of the triangle is a descending trendline, while the lower trendline is a horizontal trendline. In the following example, we use a 60-minute stock chart for General Motors (GM).
What Happens with a Failed Descending Triangle Pattern?
Both the ascending and descending triangle are continuation patterns. The descending triangle has a horizontal lower trend line and a descending upper trend line. The ascending triangle has a horizontal trend line on the highs and a rising trend line on the lows. For a continuation pattern, like descending triangle patterns to be confirmed, a trend needs to be established. If the distance from the triangle peak to the horizontal support is 10%, the logical price target should be 10% above the breakout.
- A break of the supporting line activates the pattern and offers us two options for entry, as it is the case with all candlestick chart patterns.
- When a descending triangle reversal pattern appears at the bottom, the security’s price records multiple lower highs.
- In the current market, it’s more difficult to find great stocks to trade and execute your plan…
- In case the price action returns within a triangle, the pattern is invalidated, and the stop loss is triggered.
- We’re also going to cover the psychology behind the descending triangle reversal.
- The price target is usually equal to the entry point minus the vertical distance between drawn lines when the breakdown takes place.
We have to take it one step forward and confirm the breakout by using the Chaikin Money Flow indicator to confirm the supply-demand imbalance. The readings that we get from the Chaikin Money Flow will tell us if the sellers have stepped in or not. This compression to the downside is what makes the pattern bullish. All because they didn’t follow their plan and used too much size. In trading any pattern, you want to use a good position size and follow your trading plan.
The Best Descending Triangle Pattern Scanners
This page describes the descending triangle pattern of the Elliott wave principle, how price moves not in a straight line but in
a series of rises and retracements. Ultimately, each trader decides what confidence they attach to the signal and whether further data (i.e. additional analysis tools) is needed to support a position. Descending triangle patterns, therefore, offer insight into the likely direction of a stock, not an exact prediction. Typically, traders that leverage this tool monitor the stock’s price, waiting for a breakout. This contrasts with an ascending triangle, which is largely a bullish formation. For a Descending Triangle, X is defined as the distance between the highs and lows of the Descending Triangle chart pattern.
We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. Among the upward breakouts, the most desirable to find are those that happen after a gap. Larger gaps seem to leave less chance for the price to retreat back into the triangle. Statistically, downward breakouts are more likely to occur, but upward ones seem to be more reliable.
The Descending Triangle Pattern Timeframe
The features usually apply to both financial markets and foreign exchange markets. When the level of support is broken, it becomes a level of resistance, confirming the overall downward trend of the asset’s price over time. So, to make things what is a descending triangle simple, we will walk you through 5 easy steps for identifying the pattern. There is no need to make use of volumes when trading with this strategy. Also note that you will not always see a bullish signal from the EMA’s prior to the breakout.
Descending triangle patterns offer many advantages, such as being easily identifiable and produces a clear target level, which is based on the maximum height of the triangle. However, one major disadvantage of using descending triangles is that there is always the potential for a false breakdown, which is where the down trend reverses pattern. Eventually, price action breaks out from the sloping trend line. Measure the distance from the horizontal support to the initial high and project this distance from the breakout level. 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.