The descending triangle is one of the most popular chart patterns used in technical analysis. This pattern can signal an upcoming bearish breakout on a stock, cryptocurrency, commodity or forex pair.
What is a Descending Triangle Pattern?
A descending triangle pattern forms when the swing highs of a stock create a flat trendline, but the swing lows create a downward sloping trendline. This creates a triangular shape on the chart, with the flat top trendline acting as resistance and the downward sloping bottom trendline acting as support.
The descending triangle is considered a bearish chart pattern used in technical analysis. It signals that demand is weakening and there is potential for a breakdown to the downside. The pattern indicates that buyers are losing momentum as each swing high makes a lower high.
Key Takeaways:
- Formed by a flat resistance trendline and downward sloping support trendline
- Considered a bearish continuation pattern
- Signals weakening demand and potential for a bearish breakdown
How to Identify a Descending Triangle
There are a few key characteristics to identify in order to spot a descending triangle pattern:
1. Flat Resistance Trendline
A flat or horizontal resistance trendline connects at least 2, but ideally 3 or more swing highs on the chart. Each swing high hits around the same price level, creating resistance.
2. Downward Sloping Support Trendline
A downward sloping support trendline connects at least 2, but ideally 3 or more swing lows on the chart. The swing lows create a series of lower lows.
3. Converging Trendlines
The distance between the resistance and support trendlines narrows as the pattern develops, converging towards an apex. This reflects the weakening momentum.
4. Breakdown Below Support
Eventually, the support breaks and price falls below the lower trendline. This triggers the bearish breakdown. The lower the breakdown point, the stronger the pattern.
5. Increase in Volume on Breakdown
Ideally, there will be a spike in trading volume during the breakdown for confirmation. Higher volume reflects increased selling pressure.
Real Life Example
Below is an example of a descending triangle pattern on the Apple (AAPL) daily chart. Notice the characteristic features – the flat resistance trendline, downward sloping support trendline, converging towards an apex, the support break and increased volume on the breakdown for confirmation:
Now that you know what to look for in a descending triangle formation, let’s go over some real examples from the financial markets…
Real Life Descending Triangle Examples
Descending triangles occur frequently across many markets. Here are a few descending triangle examples from stocks, forex and cryptocurrency:
Starbucks (SBUX) Descending Triangle
In September 2021, Starbucks formed a descending triangle pattern over a few weeks on the daily chart. The upper resistance was around $115 while the lower support sloped down to around $108.
Volume picked up as the pattern neared the apex. The support trendline broke and SBUX declined further after the breakdown. Traders who went short after the breakdown profited from the move lower.
EUR/JPY Descending Triangle
On the daily EUR/JPY forex chart in March 2020, a descending triangle pattern was forming over a 1 month period. Resistance was around 117.80, while support sloped downward to 114.50.
When support broke, EUR/JPY dropped over 600 pips lower over the next few weeks. Traders capitalized on this bearish pattern.
Dogecoin (DOGE) Descending Triangle
In June 2021, Dogecoin formed a descending triangle on the 4-hour chart. The horizontal resistance was around $0.38 to $0.40, while the support trendline sloped down toward $0.25.
When the support broke, DOGE/USD plummeted over 35% lower. The bearish pattern provided a profitable shorting opportunity.
These examples demonstrate how descending triangles can form across all markets during bearish moves. Now let’s discuss how to actually trade descending triangles…
How to Trade a Descending Triangle
Now let’s discuss how to actually trade descending triangle patterns. Here are some tips:
Enter on Support Break
The textbook way to trade a descending triangle is to wait for a confirmed support break and then enter short. Place a stop loss above the recent swing high. Target a 1:1 risk-reward ratio initially.
Use Limit Orders
Place limit orders to enter and exit trades based on the technical levels. This eliminates emotional decision making.
Consider Volume
Ideally look for an increase in volume on the support break for added confidence. Higher volume confirms increased selling pressure.
Use Stop Losses
Always use stop losses to limit downside risk in case the setup fails. Adjust stops to lock in profits as the trade moves in your favor.
Trail Stops
Consider trailing stops to lock in profits as the trade moves lower. This protects unrealized gains while still giving the trade room to continue towards your targets.
Scale Out of Winners
You can scale out of profitable trades in portions instead of exiting the entire trade at once. For example, close out 1/3 at a 1:1 target and let the rest run with a trailing stop.
Be Patient
Allow the pattern to develop and avoid anticipating the breakdown. Wait for the actual support break and look for increased volume for confirmation.
Proper risk management, patience and planning your entries/exits are essential for effectively trading descending triangle chart patterns.
Pros and Cons of Descending Triangles
There are some advantages and drawbacks to consider with trading descending triangle patterns:
Pros
- Provides clear trading signals and defined risk/reward
- Pattern has an expected outcome (bearish breakdown)
- Stop loss and profit target levels easily defined
- Good risk/reward potential if traded properly
Cons
- The setup may fail with a break above resistance
- Requires patience to allow pattern to fully develop
- Lower volume can result in false breakout signals
- Potential for whipsaws and false breakdowns
With the proper confirmations, descending triangles offer a reliable chart pattern with a favorable risk/reward ratio. However, like any setup, they have the potential to fail so proper money management is key.
FAQs
Let’s go over some frequently asked questions about descending triangle patterns:
What’s the ideal slope of the support trendline?
A steeper downward slope reflects increased bearish momentum and typically leads to a stronger breakdown. However, the slope itself does not affect pattern validity.
How long does the pattern take to form?
Descending triangles can form over a few weeks to several months. Give the pattern time to fully develop.
Where should I place my target after the breakdown?
Initial targets are based on the size of the triangle measured from the breakout point. So if the triangle is $10 tall, the initial target is $10 lower from the support break.
Does low volume invalidate the pattern?
Ideally look for higher volume on the breakdown for confirmation. But a descending triangle can still be valid even with low volume as long as the technicals align.
Should I trade descending triangles on all time frames?
Descending triangles can be traded on 1-minute charts up to weekly charts. Shorter time frames will result in smaller targets and tighter stops. Analyze each chart pattern within its context.
And that covers the key questions! The descending triangle is one of the most common chart patterns and can offer favorable risk/reward when traded properly.
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