Understanding Descending Triangle Pattern: Chart patterns are the graphical representation of the price movements of stock, currency, commodity, or index in the financial markets.
These are patterns that are formed over a period of time that is used by traders to identify future price movements in the securities which enables them to enter potential buying or selling opportunities.
These chart patterns are differentiated into several types based on their characteristics and interpretations. Some of these chart patterns include head and shoulders, triangle, and double top/bottom patterns.
Before learning to use these patterns in the market, it is important for individuals to understand the characteristics of each of these patterns in order to utilize them in an efficient manner.
In this article, we are going to cover one of the commonly used chart patterns, which is the descending triangle pattern, learn about its characteristics, and see how it can be used in the market.
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What Is A Descending Triangle Pattern?
A descending triangle pattern is a bearish continuation pattern that is formed by a horizontal support level and a downward-sloping resistance level in the market.
This pattern is formed when the price of an asset is trending downward forming lower highs with no change in the support levels which results in the convergence of the support and resistance levels.
The descending triangle pattern is typically considered a bearish pattern and is often used by traders as a signal to sell the asset. This is because the pattern indicates that the bears are in control and that the bulls are losing momentum.
Characteristics Of Descending Triangle Pattern
One of the key characteristics of the descending triangle pattern is that the resistance levels of the stocks keep decreasing while the support will almost be on the same level.
The price will often bounce off the resistance level and then fall to the support level before bouncing back up again.
Another characteristic of the descending triangle pattern is that the volume will usually decrease as the pattern progresses. This is because as the stock gets closer to the support level, the bulls and bears become more cautious, decreasing trading activity.
However, the volume tends to increase when the stock breaks the support levels indicating that the bears are in control and the stock will likely move lower.
How To Trade A Descending Triangle Pattern?
There are 2 different ways to trade a descending triangle pattern:
1. Breakout to the downside: Individuals often use the descending triangle pattern to signal to sell/short the stock at the break of it.
The best time to sell or short a stock is when it breaks through the support level signalling that the bears are in charge and that the stock is likely to fall further.
2. False breakout to the upside: Sometimes when a security is trading in a descending triangle pattern, it tends to break out in an upward direction.
In these situations, the stock manages to fall back into the range of the descending triangle pattern. It can be an excellent opportunity to enter a short position as the price is likely to continue to decline.
But one needs to wait for confirmation before entering a trade using this pattern. Technical or candle-based confirmation is a must.
Steps To Remember While Trading Descending Triangle Pattern
- Wait for confirmation: Instead of entering a trade immediately after a breakout or false breakout, traders can wait for confirmation of the pattern. This can be done by looking for further price action or by using other technical indicators such as the RSI indicator.
- Set stop loss and profit target: When trading descending triangle patterns, it is important to set stop loss and profit targets. The stop loss should be at the support levels of the descending triangle pattern which have now become the resistance level since the price has broken the support. The profit target for this pattern should be at the immediate next support of the price of the security.
The Limitations Of Using A Descending Triangle
Descending triangle patterns have the possibility to give fakeouts, which is one of their drawbacks.
There are even situations where the trend lines need to be redrawn as the price action breaks out in the opposite direction.
If a breakdown doesn’t take place, the stock may go back up to re-test the upper trend line resistance before making another move lower to re-test lower trend line support levels.
The chart pattern is more solid the more often the price reaches the support and resistance levels.
Also Read: 8 Best Books For Intraday Trading – Top Reads For Beginners!
In Closing
In this article, we discussed what is Descending Triangle Pattern, its characteristics, its limitations, and ways of trading using this pattern.
The descending triangle pattern is a bearish chart pattern formed by a horizontal support level and a downward-sloping resistance level. It is typically considered a bearish pattern and is often used by traders as a signal to sell the asset.
However, it is important to note that the pattern is not always a reliable indicator of future price movements and other technical indicators should also be considered before making a trading decision.
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