Descending triangle patterns are a bearish pattern. They have 3 or more previous support levels that form a flat bottom. They also have lower highs that form, causing a bearish trendline. Look for price to fail the base of the triangle. If price action retests the base and fails then you’ll have bearish confirmation.
A descending triangle pattern consists of several candlesticks that form a sloping top and at least two to three previous low levels that form a flat bottom due to horizontal support. The sloping top is formed using trend lines by connecting at least two to three lower highs. Descending triangle patterns are bearish chart patterns. Descending triangles are formed by drawing trend lines that connect to form the triangle pattern.
Descending triangle patterns have two trend lines that connect lower highs as well as a group of lows. Watch for the move below the lower trend line which is support. It’s telling you downward momentum is building.
Breakdown for that stock is about to happen. Once that breakdown occurs traders can short the stock making it fall even lower.
Not all brokers have shares to short, so have an account with a broker such as Interactive Brokers. Getting into options can be a good move to play both sides of the trade from puts. Put options take the short side of things.
How to Trade Descending Triangle Patterns
- Watch for a descending triangle by connecting at least two to three sloping peaks
- Connect at least two to three previous lows via horizontal price lines
- Once price breaks down out of the base of the flat bottom and holds take short entry
- Use a candlestick close midway above the upper trend line as your stop
Trend lines are important to trading triangle patterns. For a continuation pattern, like descending triangle patterns to be confirmed, a trend needs to be established.
Being a bearish trend the duration and length is not as important as the strength of the pattern formation. The lower horizontal trend line needs at least 2 retain lows thus forming the line.
The lows should be pretty close together. There needs to be some distance between the lows with a reaction in between them.
The upper descending trend line needs at least 2 highs to form the line. These highs need to be lower than the previous highs with some distance between them. If the most recent high is the same or higher than the previous high, the descending triangle is no longer valid.
When the stock breaks out of the descending triangle the support (lower horizontal trend line) now becomes resistance; trend lines turn into key areas of support and resistance.
The stock will most likely go back up to test that resistance level before continuing its move down. Always remember that patterns can break down and reverse at any time. Patterns are ways to help and are not 100% accurate and should be used in combination with other trading tools.
Frequently Asked Questions
A descending triangle is typically a bearish pattern but it can become bullish. The way that it becomes bullish is if price action breaks out of sloping angular resistance and the retest confirmation holds. Normally, it's a bearish pattern when price action fails the base of horizontal support.