What is Descending triangle pattern
There are numerous types of chart patterns in technical analysis. They all get their names according to the shapes that the price graph form between the support and resistance line. The typical kinds of patterns are triangles, wedges, channels, and head-and-shoulders. A triangle forms when two trendlines converge. That is, the tops and bottoms of the price action converge like the sides of a triangle. Different kinds of triangles can be seen on a price chart, namely ascending and descending triangles, symmetrical triangles, etc. This
article focuses on the descending triangle.A descending triangle is a bearish chart pattern that features two converging trendlines. The bottom trendline (support) is horizontal, and the top trendline slopes downward. The pattern illustrates lows occurring at a constant price level, while highs always move lower. The pattern shows two highs touching the upper trendline and two lows touching the lower support trendline. A descending triangle usually occurs as a continuation of a bearish trend.
Descending triangle breakout
A pattern is said to have “broken out” once it has crossed either the support or resistance line. If the descending triangle broke in the same direction as the preceding trend, it is called a continuation pattern. However, if the breakout is in the opposite direction, it is called a reversal pattern. When the upper and lower level of a triangle interact, traders expect an eventual breakout from the triangle. As such, most breakout traders use triangle formations for identifying breakout entry points.
For example, a pattern described as a bearish Reversal triangle would mean that it is a bearish signal; that is, the breakout was downward through the resistance line. Because it is a reversal pattern, it means the previous trend was in the opposite direction as the breakout, implying, the previous trend was bullish.
In a bearish market, the descending triangle will show a bearish potential that is equal or near-equal to the size of the triangle. This action is the primary reason why most traders use the descending triangle to open short positions after the price has broken downward. For a valid breakout, there should be a corresponding increase in volume, especially on upside breakouts.
After a breakout move (up or down), the apex of the triangle becomes the support or resistance. The price may return to test the top or a support/resistance level before continuing in the direction of the breakout. When the price breaks below the support line (usually somewhere between halfway and three-quatre length of the pattern), it is an indication to buy.
Descending triangle bullish
A Bullish descending triangle can be seen in two main areas within the market structure. Trend continuation and as a reversal. Usually, a descending triangle is considered “bearish” and is traditionally found in a downtrend. However, a descending triangle can become bullish during a reversal.
When we see a descending triangle forming, we know with a high degree of certainty that the market is building up energy for the next move or breakout, the market has entered a trading range and is narrowing. Learning to recognize and trade these patterns in real-time allows you to prepare to enter a trade well in advance.
Descending triangle stock pattern
A descending triangle is considered a bearish continuation pattern, meaning you will be looking to trade in the direction of an already established downtrend. The descending triangle gives us the consolidation a stock needs to continue the downtrend.
It is critical to note that sometimes, a descending triangle can break through the inclined level, and when this happens, it causes a false signal and traps some traders along the way. A wise and best move here is waiting or the close of the candle to confirm the breakout. This move will help limit many of the false signals.
In a descending triangle, there are a few characteristics to pay close attention to such as
- The point of occurrence of breakout- when prices breakout, the closer the breakout occurs to the apex of the triangle, the less reliable the prediction is.
- Duration pattern of the triangle- The duration pattern is a critical consideration, the longer the pattern, the longer for the price to reach its target. The shorter the pattern, the quicker the price moves. A trader considering short-term trading should look for a pattern with a short duration, while aa trader considering long term trading should look for a pattern with a more extended period.
- The shape of the descending triangle- the horizontal bottom trendline need not be completely horizontal.
- Volume- it is essential to pay close attention to the volume. Generally, volume follows a dependable pattern; volume diminishes as the price swings back and forth within the triangle pattern. Traders should see decreasing volume as the pattern progresses towards the apex of the triangle. At breakout, there should, however, be a noticeable increase in volume.
The target price also provides useful information about the potential move of a descending triangle pattern. You should consider if the target price is sufficient to provide an adequate return after your costs have been taken into consideration. A pattern is useful if it indicates a potential return of greater than 5%.
Descending triangle reversal
Reversal chart patterns are those formations that suggest the ongoing trend is about to reverse. In an uptrend, when a reversal chart pattern is formed, it signals that the trend will change course, and the price will head down soon. However, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on. ‘Bearish Reversal’ will be seen during a bullish trend, as it is suggesting we are about to change from bullish to bearish. So, a bullish reversal will appear during a downtrend.
In descending triangle forex trading, the horizontal trend lines act as support, and the downtrend lines act as a resistance. When a successful breakout occurs on this pattern, then the entry can be taken. The target will be at least 1:2 stop loss, set above of near swing low.
Descending triangles are easy to spot and provide excellent risk-reward opportunities. Traders can quickly identify that a big move is in proximity, as well as the profit objective and the amount to be put at risk. In trading a descending triangle, traders look to launch a short position as a result of a surging volume breakdown from lower trend line support. Usually, the price target for the chart pattern is equivalent to the difference between the entry price and the vertical height between the two trend lines at the time the breakdown took place. The upper trend line resistance comes in handy as it performs the function of a stop-loss level to help reduce risks. Chart patterns, when used appropriately, can give your trading an edge, and this is the advantage you need to make money and becoming a more confident trader.