In this lesson, we’ll examine the Descending Triangle—a formation that signals potential weakening of an uptrend or continuation of a downtrend. It’s defined by a horizontal support line and a descending resistance line, forming a triangle whose base angles downward.
Characteristics of the Descending Triangle
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Support Line:
The lower boundary is horizontal, marking a level of support that price repeatedly tests. -
Resistance Line:
The upper boundary slopes downward, with each successive high lower than the last—illustrating weakening buying pressure. -
Volume:
As the pattern develops and the lines converge toward the apex, trading volume usually contracts, reflecting consolidation before a potential breakout.
Signals Generated by the Descending Triangle
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Sell Signal:
Occurs when price breaks and closes below the horizontal support—ideally accompanied by a surge in volume. -
Timing of Breakout:
The breakout should occur before the pattern reaches 75% of its total height (measured from the first high to the first low), which helps filter out false breakouts and improves reliability.
Expected Move after Breakout
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Price Target:
The anticipated downside move should be at least equal to the triangle’s maximum height.
Trading Tactics
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For Existing Holders:
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On a downside breakout: Consider selling immediately.
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On an upside breakout (failed pattern): Monitor other market cues and be prepared to exit or hedge your position.
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For New Entrants:
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Consider opening a short position after the pullback following a confirmed downside breakout—provided volume supports the move.
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Key Considerations
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Timeliness of Breakout:
Ensure the breakout occurs no later than 25% before the triangle’s apex to capture the most reliable move. -
Role Reversal of Support:
After a valid breakdown, the former support line often becomes resistance—useful for placing stop-loss orders.
Summary
The Descending Triangle is an important pattern for traders, signaling the likelihood of a continued or accelerated downtrend. Paying close attention to volume and breakout timing will improve the effectiveness of your trades and risk management.
