What is a Descending Triangle?
A Descending Triangle is a bearish continuation and a reversal chart pattern (or a bearish price action pattern) that often appears in the middle of a downtrend or at the end of an uptrend.
After a Descending Triangle formation, the price generally goes to the downside.
However, in reality, the price could go on either side following a breakout.
Although a Descending Triangle implies a downside price breakout, you could see an upside price breakout when this pattern forms in an oversold market condition.
As the name suggests a Descending Triangle consists of several lower or descending highs and parallel lows.
The descending highs indicate that the selling pressure is high and the parallel lows indicate that the buyers are optimistic about that specific price level. And at the end of the day, the direction of the breakout is decided by the strongest opponent (either Buyers or Sellers).
To identify and spot a Descending Triangle draw trendlines by connecting the descending highs and the parallel lows.
How to Trade a Descending Triangle?
To trade a Descending Triangle place a buy order the moment it breaks out from either of the trendlines.
Although this pattern is said to be bearish the final breakout can happen on either side (as I already mentioned earlier).
When the price breaks out from the Descending Trendline it indicates an upside breakout with a bullish price target.
On the other hand, the moment the price breaks out from the Horizontal Trendline it indicates a downside breakout with a bearish price target.
The next step is to confirm the volume and a pre-defined Stop-Loss to exit the trade in case it goes out of your favor.
The moment the price breaks out through one of the trendlines the volume should increase.
In the following Bitcoin chart, the volume has increased upon the downside price breakout.
Whether it is an upside or downside breakout increasing volume gives a hint that the breakout will probably sustain.
For the Stop-Loss trigger place it above the breakout candle or above the nearest local resistance level.
Now the question comes in…
How to set the target?
To set or calculate the target draw a line from the first high of the descending highs to the parallel lows.
Then copy the line and place it on the horizontal line that connects the parallel lows.
This is how this can be done.
The height or end of the vertical line will be the target.
See the following image for more clarification.
As you can see in the image the target has been achieved perfectly.
But this doesn’t necessarily give any guarantee that the technical target will always be achieved. The price can turn back before it reaches the technical target or it can even move further away from it.
Hence it is a good practice to book your profits early or to trail your stop-loss.
You might think that…
What if the price breaks out to the upside?
How will I measure the target then?
This is quite simple.
Place the copied vertical line on the location of the breakout (on the spot the candle nukes the line that connects the descending highs).
The tip of the line will be the target.
That’s it!
This is how you trade a Descending Triangle.
How Do You Trade a Descending Triangle? Let Us Know in the Comment Section Below.
General FAQs
A Descending Triangle is generally a bearish price action pattern.
Descending Triangles will break out to the downside most of the time.
Descending Triangles rarely break to the upside.
No, Descending Triangles are not always bearish.
You should enter a Descending Triangle after the price breaks out of the triangle. It is not recommended to enter this pattern before the price breaks out.