What is the Descending Triangle Pattern?

Have you ever looked at a stock chart and felt as if you were asked to decode an alien language? Candles, lines, patterns, it can be quite overwhelming! But don’t worry, today we’re going to break down one of the most well-known chart patterns, the descending triangle pattern.

What is a Descending Triangle Pattern?

A descending triangle pattern is a bearish chart formation that signals a potential downward breakout. It has two key parts:

• A flat support line: This is the horizontal line at the bottom, where the price keeps bouncing off but doesn’t break through yet.

• A descending resistance line: This is a downward-sloping line connecting the lower highs, showing that sellers are gaining control and pushing prices lower over time.

It’s akin to a pressure cooker. Buyers are trying to keep the price up. However, sellers are pushing harder and harder. Eventually, something’s got to give.

More often than not, the price breaks downward. Let’s say a stock has been trading between ₹200 and ₹250. Over time, it keeps hitting ₹250 but then falls to ₹200. Then it tries to go up again but only reaches ₹240, then ₹230, and so on. That’s descending triangle in action.

Characteristics of a Descending Triangle Pattern

A descending triangle pattern in technical analysis has four main characteristics:

• Existing Downtrend: The pattern forms only when a downtrend is already in place.
• Descending Upper Trendline: This is drawn by connecting the lower highs. It shows sellers are pushing prices down.
• Horizontal Lower Trendline: This acts as a support level. It prevents the price from falling further until a breakout occurs.
• Breakout and Continuation: The downtrend typically continues after the breakout below the support level.

How to Trade a Descending Triangle Pattern?

To trade a descending triangle on a price chart:

• Look for a clear pattern where the price forms lower highs while holding steady at a horizontal support level. Ideally, the trendline should connect at least two or more points on both the descending resistance and the flat support.

• This pattern usually signals a continuation of an existing downtrend. Therefore, make sure the asset is already moving downward before trading.

• A breakout below the support line is your entry signal. Some traders jump in as soon as the price breaks this level, while others wait for confirmation or use indicators to avoid false signals.

• For risk management, use a stop-loss. This is typically placed just above the descending trendline, while the take-profit target is usually set based on the height of the triangle.

Advantages and Disadvantages of Descending Triangle Pattern

Like any technical analysis trading chart, the descending triangle has its pros and cons. Let’s take a look at both sides of the coin. The advantages of this pattern are:

• Clear Entry and Exit Points: The pattern provides a well-defined structure, making it easier for traders to plan their trades.

• High Probability of Breakout: The descending triangle often results in a breakout, typically to the downside. This allows traders to make profits.

The drawbacks include:

• False Breakdown Potential: There’s always a potential for a false breakdown. If it happens, the downtrend reverses the pattern.

• Chances of Price Moving Sideways or Higher: Over lengthy time horizons, prices are likely to move sideways or higher. This is against the usual characteristic of a descending triangle.

In Conclusion

The next time you see a stock moving lower while holding a firm support level, watch out for the descending triangle pattern. It acts like a silent signal that sellers are tightening their grip and a breakdown is around the corner.