What is Descending Triangle Pattern?
It is a chart pattern, characterized by horizontal bottom and down sloping top. This is created when a bearish market pushes price down against a support level.
They are the pressure areas in a stock chart where the area of support tries to block a falling price. But the underlying bearishness of the market pushes the price slowly with swing downs and swing ups, which forms a pattern, which looks like a triangle. The bottom of the triangle is horizontal support trend line and the top is down sloping resistance trend line.
It may be both reversal or continuation chart pattern. It is so named because the descending resistance trend line predicts the fall in prices, hence the name descending triangle.
Trend is your friend. Dance with the friend. Tune to the trend.
This pattern is formed because of tug of war between the two great forces which move the price up and down, that is demand and supply.
The price might have risen above a strong resistance and now trying to move down against the resistance turned support. Or falling market might come across a support area of previous price action. Or it might be a target area where traders who went short want to book profit. Or it might be a price where some wants to buy because the price looks attractive.
Imagine a huge buying order at this particular support level. As the price move down and meet this area, they are meeting with huge buying orders which increases the demand greater than the supply. This takes the price up.
Once the price has seen a considerably rally, the stock becomes over bought. So more people wants to sell the stock which increases the supply pushing the price down. As it meets the previous support area, the price again rises due to increased demand.
This time the price rises lesser than the previous rise. Now the price moves down with with its swing top lower than the previous swing top. At lower level the price meets the high demand area and rises again.
This tug of war between sellers and buyers continues several time. But because of strong bearish under current the price swings keep making lower highs. If these swing tops are joined together by a trend line, it gives us the down sloping upper side of the triangle.
But the buying happens at a fixed level which acts as the support to the falling price. So all the swing lows are formed at the same level. If these swing lows are joined together, it gives us the horizontal lower side of the triangle.
These lower horizontal line and the upper down sloping lines if extended join on the right side. The triangle is completed by an imaginary line joining the left end of these lines.
This completes the formation of descending triangle.
Because of its weakness, It finally breaks down the support level to give us a short trade.
Study the charts given below.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns different types of triangle formation gives consistent results.
Descending Triangle is a bearish pattern. It can be a continuation bearish pattern in a down trend and it can be a reversal bearish pattern in an up trend.
The moment you see two swing lows at the same level and two swing highs with second high lower than the first swing high, you should think of this pattern formation.
Swing lows at the same level signifies strong support at that level. Lower swing highs signifies strong bearishness. Now we have to wait to see whether the support gives way or the bearishness turns to bullishness. Usually it is the support that gives way for the bearish force.
In this pattern usually the price breaks below the support level somewhere between first two thirds and the last one third of the completed triangle. Once the lower horizontal trend line is broken below, the support level becomes resistance level. The prices tend to test this resistance level by a pull back.
If the support turned resistance level gives good resistance the prices moves down. The minimum target for this down move is equal to the height of the left base of the triangle. To get this target, measure the height of the base and apply that length from the breakout point, that is the lower horizontal trend line.
Always protect your trade with the stop loss order placed above the pattern or conservatively, it can be placed above the breakout bar.
Study the charts given below.
This Descending Triangle is a bearish continuation pattern in an uptrend.
Usually Descending Triangle formation is a bearish pattern. But rarely it can also occur in an up trend when the prices make false break out above a resistance level. After break out the supply increases more than the demand, pushing the price down. Now it acts as a reversal pattern.
This Descending Triangle is a bearish reversal pattern in an uptrend.
Descending Triangle is basically a bullish pattern. So when it breaksout to the up side it invariably performs better than when it breakout to the down side.
Occasionally the prices fails to fall below the support level that is at the horizontal base of the triangle and thus rallies up.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns