Descending Triangle Pattern: Best Reversal Triangle 2023
A regular descending triangle pattern is commonly considered a bearish chart pattern with an established downtrend. A descending triangle pattern, however, may be bullish, with a breakout in the opposite direction, known as a reversal pattern. Since no chart pattern is perfect and analysis is often subjective, using descending triangles has limitations. A false breakdown may occur, or trend lines may need to be redrawn if the price action breaks out in the opposite direction.
- The descending triangle forms when the market enters the consolidation phase.
- During this period of indecision, the highs and the lows seem to come together at the point of the triangle with virtually no significant volume.
- The downside breakout from the support triggers a strong bearish momentum-led decline.
- Also note that you will not always see a bullish signal from the EMA’s prior to the breakout.
How to Identify a Descending Triangle
Ascending triangles can also form at the reversal of a downtrend but are more commonly viewed as a bullish continuation pattern. This is true of any type of trading tool used in this strategy, including triangle chart patterns. A descending triangle is an inverted version of the ascending triangle and is considered a breakdown pattern. The lower trendline should be horizontal, connecting near identical lows. They can be either a continuation pattern, if validated, or a powerful reversal pattern, in the event of failure. Traders use triangles to pinpoint when the narrowing of a stock or security’s trading range after a downtrend or uptrend occurs.
Trade Like a Predator Hunt for Opportunities
Building on the second point, a downward-sloping trend line could be drawn by linking the upper points and indicating that the sellers are pulling the prices down. Connecting the start of the upper trendline to the beginning of the lower trendline completes the other two corners to create the triangle. The upper trendline is formed by connecting the highs, while the lower trendline is formed by connecting the lows. In this video, our trading analysts explain how to identify and trade the descending triangle pattern. Following this, price breaks down below the support with strong momentum. As you can see, the minimum measure distance is nothing but the project from the initial high.
For our exit strategy, we’re going to use one of our favorite trading techniques. Instead of focusing on a static and random profit target, we’re going to use the dynamics of the price action to obtain more accurate profit targets. The reversed version of the descending triangle is the ascending triangle pattern that we have extensively talked about.
The supply line is the top line of the triangle and represents the overbought side of the market when investors are going out taking profits with them. Then, when the breakout occurs, the pattern is confirmed and the bearish trend continues. A trader will, therefore, enter a position after the breakout with a stop loss at the highest level of the last price swing inside the triangle. Traders and intraday speculators can also combine price action techniques and chart patterns with technical indicators. Moving averages are one of the oldest and simplest of technical indicators to work with. The first step in trading this strategy is to pick a stock that has been in a downtrend or in a consolidation phase.
They track price patterns over time to make predictions about future price performance. Subsequently, price action eventually breaks to the upside from the descending triangle reversal pattern at bottom. Unlike the strategy mentioned previously, in this set up, you can trade long positions.
What Is the Difference Between Breakdown and Breakout In Technical Analysis?
He descending triangle pattern is one of the top continuation patterns that appear in the middle of a trend. Traders anticipate the market to continue in the direction of the bigger trend and accordingly develop trading setups. In general, the price target for the chart pattern is equal to the entry price minus the vertical height between the two trend lines at the time of the breakdown. The upper trend line resistance also serves as a stop-loss level for traders to limit their potential losses. The great thing about the descending triangle pattern is that you can use the measuring technique and know exactly where to place your take profit order. In the above chart, you can see how the “AB” line is equal to the “CD” line.
In the next section of this trading guide, you’ll learn how to trade the descending triangle. Let’s see if we can get some trade ideas from the descending triangle breakout. As we stated before, this chart pattern operates on a one-minute chart, a five-minute chart, all the way up to higher time frames. Whether you’re scalping or swing trading, you can use it with multiple assets. This includes individual stocks, global indices, commodities, Forex, or cryptocurrency. Traders would consider opening a long or short position once the falling triangle pattern is verified based on the direction of the price movement.
There is no need to make use of volumes when trading with this strategy. Also note that you will not always see a bullish signal from the EMA’s prior to the breakout. After you get a bullish EMA signal and a breakout, it is an ideal signal to trade. Depending on your charting platform, you will notice that volume bars also change. This is because they reflect the bullish/bearish sentiment based on the Heikin Ashi candlesticks. Volume bars serve an additional purpose to alert you to a potential bullish breakout.
The above chart shows the 10 and 20 period EMA applied to the chart for GM. Notice that prior to the break out, the moving averages signal a crossover buy. The moving averages can be a great source to alert you when to initiate a trade. Let’s look at an example of a day trading descending triangle chart pattern opportunity to catch a reversal using the descending triangle on an intraday time frame.
These highs do not have to reach the same price point but should be close to each other. In the study of technical analysis, triangles fall under the category of continuation patterns. There are three different types of triangles, and each should be closely studied.
After all, there are lots of false breakouts and the markets typically have an unpredictable nature. How to identify it and how to trade currency pairs using this chart pattern? So, to make things simple, we will walk you through 5 easy steps for identifying the pattern. Traders can anticipate a potential upside breakout and trade the pattern accordingly. Projections and target price level methods remains the same as outlined in the initial strategy. In the following example, we use a 60-minute stock chart for General Motors (GM).