In this trading guide, you will learn how to trade the descending triangle pattern like a seasoned professional. In the technical world of trading, there are many different patterns to be aware of that will allow you to make more informed trading decisions. Once you master the descending triangle chart pattern, a simple chart pattern, you'll gain a clear understanding of what goes on behind the price action.
This simple chart pattern can be spotted on long-term charts and short-term charts. It doesn't matter what your trading style is; whether you are a swing trader or day trader. Anyone can use the technical analysis descending triangle to spot profitable trading opportunities.
In this article, we’re going to explain the requirements of the descending triangle and how to spot it in real-time. We’re also going to cover the psychology behind the descending triangle reversal.
Descending Triangle Pattern
The descending triangle pattern is a continuation chart pattern that develops in the middle of a downtrend. However, in some instances, this can play as a descending triangle reversal. Also known as the bullish descending triangle pattern.
The descending triangle stock pattern is a versatile chart pattern that is viewed as a continuation pattern and a reversal pattern at the same time.
The reversed version of the descending triangle is the ascending triangle pattern that we have extensively talked about.
The main features of the descending triangle pattern are:
- A flat support line.
- A descending trend line that connects a series of lower highs.
- The flat support line and the descending trend line converge to a point.
Imagine that, at the top of the descending triangle chart pattern, there is a downtrend composed of a series of lower highs that are connected by a trend line slopping downwards. At the bottom, there is a solid floor of support that is tested at least 3-4 times. The support level is the bottom from where the price couldn’t push any lower.
Below you can see the ideal descending triangle chart setup:
As we stated before, this chart pattern operates on a one minute chart, five-minute chart, all the way up to higher time frames. Whether you’re scalping or swing trading, you can use it with multiple assets. This includes individual stocks, global indices, commodities, Forex, or cryptocurrency.
The psychology behind this pattern can be explained with the fundamentals of the supply and demand imbalances. You can see the technical analysis descending triangle as a pause of the downtrend. It’s easy to understand how the demand gets drained during the development of the descending triangle.
This compression to the downside is what makes the pattern bullish.
Remember: all continuation patterns, such as the bullish flag, rectangle pattern, and others you can find on our Trading Strategy Guides website, must have the context of a trend.
See the chart below:
In the next section of this trading guide, you’ll learn how to trade the descending triangle. Let’s see if we can get some trade ideas from the descending triangle breakout.
Descending Triangle Reversal
First, let's study the case of the descending triangle reversal. Typically, the descending triangle is more powerful when traded in the context of a trend. It's also more powerful when traded in the direction of the prevailing trend.
However, the descending triangle reversal pattern can potentially reward you with bigger profits if traded in the right context. We only trade the descending triangle reversal pattern when this price formation develops at the end of a bullish trend, and in the context of an uptrend.
The reversal chart pattern emerges as the buying activity declines and the market fails to make fresh new highs. This shows that the demand – supply imbalance is shifting in favor of the sellers as buyers get exhausted.
In this case, we’re going to be looking for the flat bottom to get conquered by the bears. The potential support breakout can signal a powerful trend reversal.
Let’s look at an example of a day trading opportunity to catch a reversal using the descending triangle on an intraday time frame.
See the Forex GBP/USD chart below:
When trading the descending triangle pattern, we’re always looking for the support breakout to give us a potential entry point. Unlike the textbook saying that teaches retail traders that a support or resistance level gets stronger if we have multiple retests; contrary to that the reverse is true.
Note: The more a support level is tested the weaker it becomes.
Additionally, the breakout candle must also produce a close below the flat support level for a valid trade setup.
But, that’s not all.
We have to take it one step forward and confirm the breakout by using the Chaikin Money Flow indicator to confirm the supply-demand imbalance. The readings that we get from the Chaikin Money Flow will tell us if the sellers have stepped in or not.
You only have to check if the Chaikin Money Flow line has spent more time below the zero line during the time the descending triangle emerged. A reading below the zero line indicates selling pressure.
See intraday chart below:
For our exit strategy, we’re going to use one of our favorite trading techniques. Instead of focusing on a static and random profit target, we’re going to use the dynamics of the price action to obtain more accurate profit targets.
To get our profit target simply measure the depth of the triangle. Just count how many pips there are from the flat support line to the highest point of the triangle. Once you have that measurement, project it to the downside starting from the flat support level.
See the chart below:
You can see how the projected triangle depth measurement becomes a very accurate profit target. This is a powerful exit strategy that can maximize your profits.
Let’s now stop for a second and see how to trade the right way the descending triangle as a continuation pattern.
Descending Triangle Trading Strategy
It’s important to remember that the descending triangle chart pattern is traditionally used to anticipate potential breakouts in the direction of the bearish trend. In the following example, we’re going to combine the descending triangle with the power of technical indicators.
Using the Chaikin Money Flow indicator, along with the descending triangle breakout creates a very powerful trading strategy. One of the main characteristics, unique to the Chaikin Money Flow indicator, is its ability to gauge the buying and selling power.
Most retail traders struggle to gauge the supply and demand equation in the market. You can resolve this struggle by switching to the Chaikin Money Flow.
In this strategy, traders simply have to see an agreement between the support breakout and the Chaikin Money Flow reading. Once the descending triangle breakout happens, we need to have a Chaikin Money Flow reading below the -0.2 level.
The profit target projection is based on the same exit strategy we used previously. Measure the triangle depth and project the same price distance starting from the flat bottom.
Conclusion – Descending Triangle Chart Pattern
Trading involves risk and hard work. Make sure you first get familiarized with the descending triangle pattern before you commit any real money with this chart pattern. Stop looking for the Holy Grail and learn how to trade like the pros do. Use these simple trading tricks that are very powerful when used in the right context. Be sure to read our latest article on Technical Analysis Strategies.
The descending triangle chart pattern can be combined with your preferred trading strategy. Once you learn to identify them and train your eyes to see them in real time it will help you better understand the price action. The supply and demand imbalances inside the descending triangle reversal will almost always generate fast and furious breakouts.
Also, be sure to learn about the Symmetrical Triangle Trading Strategy.
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