- Descending Triangle Trading Pattern
Real-life Chart Examples
A Descending Triangle is a bearish chart pattern that consists of two trendlines: 1) a horizontal trendline at a level of support defined with no fewer than two swing lows and 2) a downward slanting trendline connecting a series of lower swing or pivot highs.
The pattern starts to form when price action traces an orderly price rise from a swing low much like a pullback sell. The price then declines down to the prior swing low and stalls. A second rally occurs as underling support is decreased and the stock then forms a lower swing high. This occurs over and over again until a series of equal swing lows and lower swing highs are formed.
The power of a Descending Triangle can be greater after a powerful downside move due to the possible decrease of overhead resistance.
Technical analysts realize that Descending Triangles can be stronger when the swing low that begins the pattern is also an all time low due to the possible lack of future underlying support. Traders typically work into short positions when the price of the asset breaks below the bottom support.
Descending Triangle Trade Setup:
This is a bearish continuation or breakout pattern that often appears during a downtrend. It indicates potential continuation in the prevailing bearish direction after a period of consolidation.
Predictability & Factors to Consider:
Imagine a stock in a downtrend has been trading between $90 and $80 for several weeks. The price has tested the $80 support level multiple times, forming the horizontal line of the triangle, but has made progressively lower highs at $89, $87, and $85, forming the descending trendline. If the stock breaks below the $80 support level with significant volume, a trader might anticipate a bearish continuation. Given the triangle's vertical height of $10 ($90-$80), the trader might set a target price of $70 ($80 - $10).
WARNING: As with any technical pattern, it's essential to approach the descending triangle with caution. While it has displayed predictability in some scenarios, no pattern guarantees outcomes. External factors and unforeseen news can influence the stock's price movement. Always utilize multiple indicators and comprehensive research for informed trading decisions. This is for educational purposes only. Always consult a registered investment advisor before trading.
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