The chart pattern indicates a trend reversal when it appears in an uptrend and a trend continuation when it appears in a downtrend. The continuation signal is considered more important although traders use both signals to forecast a trend’s direction. Traders often initiate a short position following a high volume breakdown from lower trend line support in a descending triangle chart pattern. Traders regard it as one of the most reliable and successful trading patterns. It has an accuracy of 79% in predicting a downtrend with an average price decline of 16%. Technical chart patterns are of significant importance in the trading world because they help traders forecast a specific stock’s expected future price movement.
While these patterns can provide valuable insights, they are not foolproof. It’s essential to combine them with other analysis tools and stay updated with market news. In a rising market (left), the cup pattern should be in the shape of a “U.” The handle appears as a short pullback on the right side of the cup. When the handle is finished, the price may break out to new highs and resume its upward trend.
Is a Descending Triangle a Continuation or Reversal Pattern?
A descending triangle is a bearish technical chart pattern formed by a series of lower highs and a flat, lower trendline that acts as support. Once the stock price breaks below the horizontal support line, project the measured distance downward from the breakout point. On the flip side, the ascending triangle pattern is characterized by a horizontal resistance line and an ascending trendline. The price forms higher lows, creating a triangle shape with a flat resistance line.
Descending Triangle Technical Analysis
Filippo’s goal with InvestinGoal is to bring clarity to the world of providers and financial product offerings. When drawing a descending triangle, a minimum of two swing high peaks for the resistance line and two swing low troughs for the support line are needed to successfully complete the drawing. When acquiring our derivative products you have no entitlement, right or obligation to the underlying financial asset.
CFD trading guide
The descending triangle chart pattern is not suitable for all types of trading. Descending triangles perform optimally in technical trading and swing trading environments where price action analysis drives decision-making. Bearish continuation patterns such as the descending triangle excel when traders can capitalize on medium-term breakout movements that typically descending triangle chart pattern occur within several days to weeks.
- Any references to past performance and forecasts are not reliable indicators of future results.
- Additionally, traders can easily identify and measure the risk/reward ratio of their trade.
- Spotting a descending triangle chart pattern can be as much of an art as a science.
A descending triangle pattern is formed by drawing a horizontal line that connects a series of relatively equal lows, creating a support level. Simultaneously, a trendline is drawn connecting a sequence of lower highs, forming a descending upper trendline. This pattern emerges when volume declines and new stock price highs are limited. The trading period begins when the descending triangle reversal pattern is revealed ahead of the breakout. Because a descending triangle pattern is considered bearish, when the price of a stock breaks the support line from above, this technical tool suggests the price will continue to fall. Descending triangles assume that momentum will drive a stock price lower when it breaks this milestone level.
In the above chart set up for Goldman Sachs (GS), you can see how price fell to the lows, establishing support. The horizontal support level holds the declines where the bounce off the support level leads to lower highs. Traders and intraday speculators can also combine price action techniques and chart patterns with technical indicators. Moving averages are one of the oldest and simplest of technical indicators to work with.
- Eventually, a breakout occurs in either direction, signaling a reversal or continuation of the trend.
- The descending triangle’s height reflects the maximum distance the price has moved within the pattern.
- In most cases, a descending triangle pattern can also see a sloping base as well.
- The upper trendline connects at least 2 lower highs as the price makes lower peaks on successive rallies which indicate the bears are gaining control.
Potential Disadvantages:
The key difference between these two patterns lies in their shape, breakout direction, and implications. Traders use these patterns, along with other technical indicators, to make informed decisions about their trading strategies. The descending triangle chart pattern occurs when sellers are in control, but buyers are not willing to let the trend continue lower without putting up some resistance. As buyers become more active and force prices to stay near the same level, the support line begins to flatten out. Eventually, a breakout occurs in either direction, signaling a reversal or continuation of the trend. The descending triangle pattern is beneficial for traders because it clearly signals bearish trends, allowing for precise anticipation of downward movements.
Measure the distance from the horizontal support to the initial high and project this distance from the breakout level. Subsequently, price action eventually breaks to the upside from the descending triangle reversal pattern at bottom. Unlike the strategy mentioned previously, in this set up, you can trade long positions.
It usually signals a continuation if it is formed in an uptrend during a bull market. Traders should watch how the stock responds when it reaches support and breaks out above or below the triangle to determine whether they should enter long or short positions. A descending triangle stock chart pattern has an 87% success rate on an upside breakout of an existing uptrend. When the price breaks through resistance, it has an average 38% price increase. Following a downtrend, the pattern is 79% successful, with an average price decrease of 16%.
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. As with every chart pattern, the descending triangle has both advantages and limitations. Another advantage is that it produces a clear target to the downside, which one can aim at once the price action breaks lower. The three most common triangle patterns include descending, ascending, and symmetrical triangles.
For instance, the triangle is present on a daily chart for more than a week or even for several months, although it is often seen on an hourly chart for only a few days. WallStreetZen does not bear any responsibility for any losses or damage that may occur as a result of reliance on this data. Ultimately, each trader decides what confidence they attach to the signal and whether further data (i.e. additional analysis tools) is needed to support a position. Descending triangle patterns, therefore, offer insight into the likely direction of a stock, not an exact prediction. Over time, your ability to discern where the line should be placed will improve through repetition. If both lines were extended right, the descending trend line could act as the hypotenuse of a right triangle.
Step #2: Descending Triangle Continuation Pattern
The descending triangle reversal pattern can be very easy to trade if you spot the pattern ahead of the breakout. Once you identify the lower volume, simply measure the distance from the first high and low. Then you project the same from the breakout area which becomes your target price.
