Descending Triangle Pattern Trading Strategy
Descending Triangle Pattern Trading Strategy
Imagine what it would be like if you could trade the descending triangle pattern with ease. That would mean more money to your bank and fewer losses to deal with.
Therefore, walk with us as we show you how to draw the descending triangle pattern, identify breakouts, and use this trading strategy to your advantage. You’ll find this triangle formation on cryptocurrency charts including Forex and other financial markets.
Therefore, it’s an aspect of technical analysis you can’t ignore. On the other hand, check out our guide to the ascending triangle pattern and the best strategies to employ when trading it. So, let’s get started with all you need to know about the falling triangle pattern.
What is the Descending Triangle Chart Pattern?
A descending triangle chart pattern or right-angle triangle is a continuation pattern that features dynamic resistance and static support. It’s the opposite of what you’ll see in an ascending triangle given that the latter has a horizontal resistance and rising support. But that’s just one difference between both formations.
Here’s an illustration of the descending triangle
The formation of the descending triangle can be attributed to a steady decline in price within a given time.
This means that buyers are paying less for the given asset due to a spike in selling pressure.
Now don’t get confused, here’s what we mean:
Recall how price moves from support to resistance with more buyers at support causing a reversal to the upside and more sellers at resistance leading to a retracement back to support?
Now when the number of sellers is significantly higher than buyers at a given level, the selling pressure is greater than the buying pressure.
This pressure tends to weaken the static support of the descending triangle and could finally lead to its break down or a breakout below it.
Accordingly, lower highs into support are a sign of weakness.
So, is a descending triangle bullish or bearish?
It is a bearish pattern where the price is expected to break the lows of support.
Can a descending triangle be bullish?
Yes, it can! This triangle can have an upside breakout.
We’ll tell you why.
There are a lot of factors that affect price movement and these factors could cause a breakout in the opposite direction.
An example is a positive news in the media regarding the asset. Thus, you need to understand fundamental analysis.
Nonetheless, keep in mind that this is a bearish chart pattern that could sometimes do the reverse.
An example of a descending triangle bullish chart pattern is shown below:
How to Draw a Descending Triangle Pattern
Here are the easy steps on how to draw the descending triangle pattern:
1. Check the Trend:
A descending triangle could breakout in either direction since it is a continuation pattern.
Thus, you don’t want to be looking out for this pattern in an uptrend (except at the end of an uptrend where it could act as a reversal pattern) but a downtrend.
Therefore, go to a higher time frame on your charts such as D1 or D4, and spot out the prevailing trend.
2. Look for Lower Highs into Support:
The next step is to look for lower highs into support.
All you need to do is draw a slanted trend line on-resistance and a straight trend line on support.
It may be easier to detect this bearish formation if you look for static support first.
This is because there are lots of lower highs in a falling trend but not all formations will have static support.
Here’s an example of a descending triangle pattern on the BTC chart.
How to Trade the Descending Triangle Pattern
Now that you’ve successfully outlined this pattern on your chart, how do you trade it?
Read on to find out.
1. Wait for Confirmation:
You can wait for the first two swings within the triangle to be formed before making an entry.
This is because the second swing tells you price is making lower highs but into the same level of support.
Proceed to draw the support and resistance lines and then trade them accordingly (buy at the next support and sell at the next resistance).
Alternatively, you can benefit from shorting this pattern if you are a futures trader.
The expectation is for price to break below support, hence, you can short at resistance and then take part or all of your profit at support.
2. Use a Stop Loss:
The use of a stop loss irrespective of the pattern you’re trading cannot be overemphasized.
It’ll ensure you’re not running at a major loss when the price breaks out in an unexpected direction.
Thus, if you buy at support, place a stop loss a small distance away from the trend line.
The same goes if you’re shorting at resistance but the stop loss should be placed a small distance away from the resistance line.
3. Wait for a Breakout:
Taking trades while the descending triangle is being formed will help you take a small profit from the market until a breakout occurs.
Nonetheless, you can still wait to make an entry after the price has left this consolidation region (the pattern).
Your next course of action is to make an entry (short) once the price has broken the static support line.
A stop-loss can also be placed above the descending trend line (resistance) in case it’s a false breakout.
Price could reverse back into the formation and break out in the upside direction.
4. Calculate Profit Target:
Measuring the height of the descending triangle from its start will help you forecast how extended price will move after the breakout.
Therefore, draw a vertical line at the first swing of the pattern and then transpose below the support line.
The height of the line will enable you to know where to set your take profit.
How to Detect Descending Triangle Pattern Breakout
You may be wondering, “Is there an easy way to detect a descending triangle pattern breakout even before it happens?”
The answer is yes.
Here’s how to do it.
1. Look for a Decline in Momentum:
This popular chart pattern is formed as a result of price consolidation.
And when price consolidates, it is often followed by a contraction in volume or decline in volatility.
You can use this gradual decrease in volume to detect when the breakout will occur.
The longer price consolidates within the formation, the sooner it’s going to break out.
2. Use Trading Indicators.
Trading indicators like the Moving Average Convergence Divergence (MACD) will enable you to spot a decline in momentum.
This decline is often displayed on the MACD histogram.
You can check our guideline on how to use the MACD trading indicator to determine trend and momentum changes.
Another indicator you’ll find on apps like TradingView and Tabtrader is the volume indicator.
3. Be Wary of False Breakouts:
It’s possible for the price to break below support and retrace back into the pattern.
This is a false breakout that could lead to losses if you’d short the market already.
On that note, wait for a retest of the trendline before making an entry.
If the previous support (now turned resistance) is strong, the price can bounce off it and move lower.
ABCDE Descending Triangle Correction Pattern
Elliot waves in also incorporated into triangle patterns.
In this case, there are five corrective waves in the triangles and these waves are labeled A, B, C, D, and E.
An ABCDE correction wave helps to determine when a breakout is about to occur.
The ABCDE descending triangle correction pattern is shown in the image below:
There are rules guiding the labelling of these waves.
Some of these rules are:
- Wave C must not go beyond the highs of Wave A
- Wave D must not go beyond the lows of Wave B
- Wave E must not go beyond the highs of Wave C
- The sub-waves have to be zigzags, multiple zigzags, or triangles.
Descending Triangle Pattern Probability
The descending triangle probability deals with the accuracy or success rate of this formation.
Will it adhere to what’s written on paper and break below support or do the reverse?
Recall that the expected breakout direction of a descending triangle is to the downside.
However, this may not happen in all cases.
On that note, the descending triangle has a 72.93% probability of breaking out in the direction of the trend.
This percentage is slightly higher than that of the descending or falling channel (72.88%).
Differences Between Descending Triangle and Bear Flag
Some differences between the descending triangle and bear flag are:
1. Trend Line Direction:
A descending triangle and bear flag are bearish chart patterns, however, they do not look alike.
The former has a dynamic (falling) resistance and static support while the latter has rising trendlines at its support and resistance.
This means you’ll find higher highs and higher lows in a bear flag.
2. Consolidation Time:
A bear flag is formed in downtrends when price consolidates for a short time before dipping further.
It could take a few minutes or hours for a break down to occur.
Contrastingly, it could take days, weeks, or months for price to break below support in a descending triangle.
Differences Between Descending Triangle and Falling Wedge
Some differences between the descending triangle and falling wedge are:
1. Direction of the Trend Lines:
The resistance line of both patterns descends, however, the support line of a falling wedge also descends.
Specifically, you have a falling resistance line that is steeper than support.
This formation differs from the descending triangle whose support is not sloppy.
2. Breakout Direction:
It may be a falling wedge but this is a bullish pattern that leads to an upside breakout.
The breakout direction differs from the descending triangle.
Conclusion
The descending triangle pattern may be a bearish formation but it can still be traded for profit.
Therefore, employ the strategies outlined in this guide to make the most of the pattern.
And remember, it’s important to use a stop loss to ensure you exit the trade if the price breaks in the opposite direction.
Knowing where to take profit is just as important.
