Descending Triangle Pattern: Meaning & How to trade

What is a Descending Triangle?

In Descending Triangle Chart Patterns there is a string of lower highs. This pattern is formed with a trend line that is sloping and a flat or a horizontal support line at the bottom. The pattern emerges as a price bounces off the support level at least twice. The completion of the pattern occurs after the end of a retracement in a downtrend.
A regular descending triangle pattern is commonly considered a bearish chart pattern or a continuation pattern with a downtrend. But sometimes Descending Triangle can be bullish without a breakout in the opposite direction known as reversal pattern. A descending triangle signals traders to take short position. It is detectable by trend lines drawn for the highs and lows on a chart. It is a counterpart of an ascending triangle another trend line based chart pattern used by technical analysis.

What Does a Descending Triangle Tell You?

Traders use this chart pattern, where these descending triangles clearly show that the demand for an asset, derivative or commodity is weakening. When the price breaks below the support level, it indicates that downward momentum can continue.
The descending triangle often referred to as falling triangle has an inherent measuring technique that can be applied to the pattern to gauge likely take profit targets. Traders look for descending triangles because the pattern indicates a breakdown. When the price drop happens buyers come in the push the price up even higher. However the descending triangle indicates when there is lack of buying pressure. Descending triangles are popular because they provide the trader the chance to make considerable profits over a short term. To trade the pattern technical traders take a bear position. To profit from the descending triangle traders have to identify clear breakdowns and avoid false indications. They have to consider that in case of no breakdown the price may test the upper resistance before moving down again.

How to identify a Descending Triangle

A descending triangle has following features

An existing downtrend before the descending triangle appears
The lower horizontal trend line acts as support as prices approach this level until the breakout occurs.
A descending upper trend line can be drawn by connecting the upper points and indicates that the sellers are pushing prices downward.
The downward trend continues after the breakout and is evident below the lower trend line.

How to Trade a Descending Triangle

The breakout from a descending triangle is triggered to the downside. When the trader is trading with descending triangle, he/she needs to identify the downtrend and this can be seen in the chart below. Here we have taken example of EUR/USD. The descending triangle appears as the forex candlesticks start to consolidate. The measuring technique can be applied once the triangle forms as traders anticipate the breakout.
After viewing the strong break below support, traders can enter a short position, setting a stop at the recent swing high and take profit target in line with the measuring technique.

Descending Triangle Pattern Breakout Strategy

The descending triangle breakout strategy is very simple. It involves anticipation of Breakout from the descending triangle pattern. This strategy uses a very simple combination of trading volumes and asserting the trend. The first in this is to pick up a stock that has been in a downtrend or in a consolidation phase.
Here you have to watch for lower highs and lower lows being formed. Once the price action is identified the next step is to draw or chart the descending triangle pattern. The basic premise of using this strategy is to look at the volume. The trader can observe from the volume that begins to diminish toward the end of the descending triangle pattern formation. Volumes are usually lower closer to the breakout.
Once the lower volume is identified, the trader has to simply measure the distance from the first high and low. Then the trader can project the same from the breakout area which becomes your target price. The simple volume based descending triangle pattern is easy to trade but requires lot of time to watch the charts.

Descending Triangles with Heikin-Ashi Charts

Using Heikin Ashi Charts along with the descending triangle pattern you can develop a powerful but simple trading strategy. Heikin Ashi charts are visually different compared to the conventional chart Type. Heikin Ashi Charts has the characteristics of depicting trend easily. Most traders often struggle when it comes to identifying the trend. Most traders find it difficult to identify the trend. This confusion is easily resolved by switching to Heikin Ashi Charts. In this strategy traders simply need to wait for the descending triangle pattern to be formed. Once the pattern is identified the next step would be to wait for the bullish trend to pick up. In most cases, you will find that the Heikin Ashi candlesticks turn bullish prior to the breakout.
The projections are based on the same strategy as before. Measure the distance from the first high to the first low and project the same from the anticipated breakout level. Depending on your charting platform you will notice that volume bars also change. This is because they reflect the bullish/bearish sentiment based on Heikin Ashi Candlestick. This strategy is effective in short term trade.

Descending Triangle with Moving Averages

Traders and intraday speculators can combine price action techniques and chart patterns with technical indicators. Moving averages are one of the oldest and simplest of technical indicators. In this strategy we use the descending triangle pattern to anticipate potential breakouts. Along those lines the moving average indicators gives the signal to initiate trade.

Descending Triangle Reversal Pattern—Top

The trader can identify the descending triangle reversal pattern at the top of end of a rally. This type of pattern can be observed as the volume declines and the stock fails to make fresh highs. The pattern indicates that the bullish momentum is exhausting and the price action becomes the horizontal support level.
After price bounces off the support level multiple times, posting lower highs. The minimum distance that price moves prior to the breakout is measured from the initial high. The distance is projected lower after price breaks out below the support level. The descending triangle reversal pattern can be very easy to trade if you spot the pattern ahead of the breakout.

Descending Triangle Reversal Pattern—Bottom

The Descending Triangle Reversal Pattern at the bottom end of a downtrend is where the price action stalls. In such situation the trader will find the price stalls at the end of a downtrend. A horizontal support level marks a bottom in price. Multiple attempts to the upside lead to lower highs. Price Action subsequently breaks to the upside from the descending triangle reversal pattern at bottom. Unlike the strategy mentioned previously in this set up the trader here can trade in long positions.

Descending Triangles vs. Ascending Triangles

The ascending triangle is formed in an uptrend and indicates a continuation of the uptrend, It is formed as a right angled triangle with a resistance and a slope of higher vows.
The descending triangle is formed in the downtrend and indicates the continuation of the downtrend. It is formed as a downward sloping triangle with support and a slope of lower highs.

Advantages and limitations of the descending triangle

As with every chart pattern, the descending triangle has both advantages and limitations. On the positive side, it is relatively easy chart pattern to identify. Another advantage is that it produces a clear target to the downside, which one can aim at once the price action breaks lower.
Finally the descending triangle chart formation is considered a reliable trading strategy as it usually yields positive results. On the other hand the descending triangle can sometimes result in a failed breakout. The other risk is that the price action can simply trade in a choppy manner i.e. sideways with no clear breakout pain.
This is why it is important to double-check.

Descending Triangle measuring technique

The descending triangle is a chart pattern used in technical analysis. The pattern usually forms at the end of a downtrend but can also occur as a consolidation in an uptrend. A regular descending triangle pattern is commonly considered a bearish chart pattern with an established downtrend.
This classical pattern has an inherent measuring technique. It can be applied to the pattern to determine likely take profit targets. For this pattern, traders can measure the distance from the beginning of the pattern, at the highest point of the descending triangle to the flat support line.
That same distance can be transposed later on, beginning from the breakout point and ending at the potential take profit level.

Conclusion

It is important to keep in mind that the descending triangle pattern is also known as a measured move chart pattern. A measured move chart pattern is when you measure the distance and project the same from a breakout. 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. The descending triangle pattern is a versatile chart pattern which often displays the distribution phase in the stock.