Descending Triangle Pattern
By Kristoff De Turck - reviewed by Aldwin Keppens
Last update: Apr 27, 2023
How to recognize a Descending Triangle?
The descending triangle pattern is is one of the three known triangle patterns. It is based on the same basic principles as the ascending triangle pattern. The difference is that this pattern is considered a harbinger of a downward breakout. Several times in a row the price drops to about the same support level where buyers take control and push the price back up.
However, the strength and volume with which this happens is insufficient, so the upward movements become smaller and smaller. This creates the typical upper bearish trend line characteristic of this pattern.
The pattern is thus characterized by two distinct lines:
- a descending trend line connecting at least 2 lower tops
- a horizontal support line connecting at least 2 price bottoms that are more or less at the same level
Descending Triangle Pattern Breakdown
As soon as the downward breakout is finally a fact, the existing bearish trend is continued. Hence the reason that within the field of technical analysis the descending triangle is generally considered a continuation pattern.
As with many other breakout scenarios, in many cases the interaction between support and resistance will become visible. A certain price level that has served as support for some time will often take on the role of resistance after a final downward breakout in case the price bounces back up to that price level.
Reliability of the descending triangle chart pattern
The more the descending resistance line and the horizontal support line are tested the more reliable the pattern becomes. The shape is also important, especially towards the end of the pattern the price channel should become increasingly narrow and the trading volume lower.
The more distinguished the pattern the more and faster it will be picked up by other technical swing traders who will recognize the setup as such and try to trade on it. In the example above, a clear double top emerged at the time the earlier support was tested for a second time. This was a very nice setup to take an initial short position or to increase an already existing short position.
Descending Triangle Pattern Breakout
Keep in mind that the probability of a false breakdown always exists, especially when this pattern occurs in a predominantly bullish long-term trend, the probability of such a false breakdown is higher. The upward breakout from a descending triangle pattern can also occur at the end of a long-term bearish trend. In that case it becomes a reversal pattern which gives a first indication that the existing long-term trend has come to an end.
Especially if there was first a classic breakdown which was very quickly reversed and then the falling trend line of the pattern was broken upwards shortly afterwards. This could possibly mark the start of a new long-term upward trend.
How to trade the descending triangle chart pattern?
There are two ways to use this pattern in a trading strategy.
Entry and Stoploss
On the chart below, the stock is sold during (1) or just after the breakdown out of the pattern (2). The stoploss is then placed either just above the previous candle (3) or above the most recent swing high (4). These are just two possibilities; wider stops are, obviously, another option.... It depends entirely on your own investment strategy.
For the second approach, after the initial breakdown (1) one waits until the price rises again to the previous support level (2). Only then a short position is opened. In this case, there were 2 opportunities after the initial breakdown to open a short position during the pull back.
Using this method, you are waiting for the price to come back a bit. The disadvantage is that if the price immediately continues to fall after the first breakdown, your window of opportunity is closed.
Price Targets for the descending triangle
Typically, the difference between the horizontal line (A) and the highest price point of the declining trend line (B) is used to determine the distance to the price target 'C' . Below is an example of such a target projection for Snowflake Inc. stock (SNOW).
However, this is a very general rule and in reality it is far better to determine the price target in regard to your initial stoploss. For example, you could use once your stop distance to determine a minimum first target price. In that case the price target is exactly the same size as your stoploss and thus you get a risk/reward of 1/1.
Suppose a short position was opened at $291,54 (short entry) with an initial stoploss level at $347,70. If the first target is set at equal distance to the stoploss we get $235,38. When this price level is reached you can opt to move the stoploss to breakeven. The second target can then be placed, for example, at twice the stop distance (in this example at $189,22)
Trailing Stoploss
In case you want to stay in the market as long as possible to cash in on as much of the trend as possible, there are better alternatives than fixed price targets. A trailing stoploss is a much better choice in that case.
Such stoplosses come in different types. For example, you could use a stoploss which is based on the Average True Range indicator. This is better known as 'the chandelier stop'.
Bottom line; when volatility is high the stoploss will be adjusted less quickly than during quieter periods precisely because the average true range is used as a reference for determining the stop distance. However, the stoploss will never be adjusted to your disadvantage. You can read more about it in this article on the chandelier stop.
How to find Descending Triangle Patterns
The descending triangle pattern is supported in our stock screener. On top of that ChartMill will also automatically draw the trendlines which make up the pattern. On the indicators tab you can just select 'Descending Triangle' from the 'Chart Patterns' filter on the 'indicators' tab. There is a fully configured screen available linked to this article. This is a direct link to the screener.
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