Last Updated on September 3, 2023
A descending triangle is a bearish chart pattern that typically emerges during a market downtrend. It is one of the major continuation patterns that appear mid-trend, indicating that bears are dominating the market as the price of security continues to decline, recording new lower highs.
What Is the Descending Triangle Pattern?
The descending triangle is a bearish formation that takes place after the price action consolidates between the descending trend line (resistance) and a horizontal line (support). The period of consolidation is completed after the price action breaks support and initiates an explosive downside move.
The descending triangle is completed once the price breaks out to the downside and typically follows up in the direction of the dominant trend. The pattern is sometimes referred to as the “falling triangle.”
In some cases, a descending triangle appears as a reversal pattern at the end of an uptrend. However, regardless of where it emerges, a descending triangle acts as a bearish pattern that signals distribution.
A descending triangle is one of the most widely used chart patterns as it is a powerful indicator of a security’s demand. Once the price penetrates through the lower support, it suggests that the ongoing downside momentum is likely to persist or even further accelerate. For traders relying mainly on technical analysis, descending triangles can create unique profit opportunities over a short period.
How to Recognize the Descending Triangle
A descending triangle can be drawn by plotting one trend line that connects a number of lower highs and another horizontal trend line that links a series of lows at a horizontal level.
For a descending triangle to appear, the market must be in a downtrend. This is critical since traders should avoid trading the pattern whenever it emerges.
Once bears take over, the descending triangle takes place as the market consolidates. During consolidation, a downward-inclined trend line can be drawn to connect the lower highs. This trend line indicates that sellers are driving the price down, suggesting that bearish sentiment is gaining momentum.
Meanwhile, the lower trendline serves as a support level, with prices frequently approaching this area and bouncing off it. Ultimately, the price gains enough bearish momentum and breaks below the support. Once that happens, traders will attempt to confirm the pattern through a continued downward movement and enter short positions to help drive the price even lower.
Descending Triangle Technical Analysis
The three most common triangle patterns include descending, ascending, and symmetrical triangles. The names of these patterns suit their shapes as their upper and lower trend lines connect at the apex on the right side to form a corner. As noted above, the upper trendline connects the highs, while the lower trendline links the lows.
As its name suggests, a descending triangle is a bearish signal. It suggests that the security’s price will continue trending downward as the pattern takes its final shape. In the case of a descending triangle, the top resistance trendline is downward-sloped, while the support trendline is flat.
As opposed to an ascending triangle, a descending triangle forms during an overall downtrend. The pattern takes shape when a security’s price drops and bounces off the support level back up. However, the move up is weaker after each bounce, with bears eventually gaining enough strength to push the price through the support level.
When this occurs, it serves as a confirmation that prices are likely to continue declining. In this case, traders typically sell the security short and place a stop-loss slightly above the highest price reached during the formation phase.
Descending Triangle Trading
There are two ways you can trade a descending triangle chart pattern. In both cases, you will have to wait for the break of the support.
The first method is more aggressive and places an entry point just below the support. Once the horizontal line is broken, the trade opens with a stop loss placed above the support – which now acts as resistance. In case the price action returns within a triangle, the pattern is invalidated, and the stop loss is triggered.
The second method is more conservative and less risky. In this case, a trader waits for a re-test of the broken support before entering a sell trade. If bulls are rejected at resistance, which is the former support, the price action drops lower and continues towards our take profit level.
The second method helps avoid false breakdowns, which occur in case the bears can’t follow up on the break. The stop loss target is also placed above the resistance line to protect from bigger losses. The breakouts are usually confirmed by higher-than-usual volume.
In both cases, the take-profit level is calculated by measuring the distance between the high and the low of the descending triangle. This vertical line is then copied and projected at the breakout point. The endpoint of this vertical line is the level where one should close the winning trade.
Descending Triangle Reversal
A descending triangle reversal pattern can emerge at the top of a price rally. It forms after the trading volume declines, and the security fails to hit higher highs. The reversal pattern suggests that the bulls are losing steam while price action creates a horizontal support level.
As the security’s price continues to bounce off the support line and record lower highs, this is typically seen as a possible downside breakout. The descending triangle reversal pattern is one of the easiest to identify before a potential price breakout.
Alternatively, the reversal pattern can also show up at the bottom end of a downtrend. In this case, the price action is usually flat after a downtrend, with the horizontal support level representing a price low.
When a descending triangle reversal pattern appears at the bottom, the security’s price records multiple lower highs. The price will ultimately make an upside breakout from the bottom reversal pattern, which traders usually view as a signal to open a long position.
Is The Pattern Bullish or Bearish?
According to popular opinion, a descending triangle has historically been seen as a bearish pattern as it emerges during a market downtrend. However, this pattern can also be bullish. In this case, it is known as a reversal pattern, which we covered above.
That said, the descending triangle can either be a continuation or a reversal pattern, with the former representing a traditional bearish formation. However, when the pattern breakout occurs in the opposite direction, it becomes a reversal formation.
It is important to note that trading the descending triangle pattern can be highly subjective. New traders should practice trading this pattern using a demo account.
When it comes to price breakouts, the escape from the descending triangle pattern can occur in either direction, though downward breakouts are statistically more likely to happen.
Advantages and Limitations
As with every chart pattern, the descending triangle has both advantages and limitations. On the positive side, it is a 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. This happens when the price action breaks lower before returning within the triangle. Another risk is that the price action can simply trade in a choppy manner, i.e. sideways with no clear breakout point. This is why it is important to double-check with the volume levels whether the breakout is real.
Descending Triangle vs. Falling Wedge
The falling wedge is a bullish continuation pattern that typically emerges following a downtrend correction. It is frequently compared with the descending triangle, though there are a few key distinctions between the two.
A descending triangle has a flat bottom that connects lower highs or a downward-sloped trendline, while the falling wedge doesn’t. Additionally, the falling wedge is a bullish pattern that follows the direction of an overall upward trend. On the other hand, a descending triangle is normally considered a bearish pattern.
Both triangles and wedges are typically long-term patterns that take shape on daily or weekly charts. They can either be continuation or reversal patterns, depending on whether they occur in an uptrend or a downtrend.
Conclusion
The descending triangle is a bearish chart formation that occurs during consolidation within a bigger downtrend move. The price action usually consolidates near lows and is characterized by a series of lower highs and horizontal lows. The breakout to the downside activates the descending triangle chart pattern, therefore offering an opportunity to take advantage of an explosive movement in the direction of the overall trend.
