The Descending Triangle

Pattern- Learn 5 Simple

Trading Strategies

The descending triangle pattern is a type of chart pattern

often used by technicians in price action trading. The pattern
usually forms at the end of a downtrend or after a correction
to the downtrend. However, it can also occur as a
consolidation in an uptrend as well.

Chart technicians can make use of the descending triangle

pattern in order to trade potential breakouts.

Bearish or Bullish?
Contrary to popular opinion, a descending triangle can be
either bearish or bullish. Traditionally, a regular descending
triangle pattern is considered to be a bearish chart pattern.
However, a descending triangle pattern can also be bullish. In
this instance it is known as a reversal pattern.

To that point, the descending triangle can be viewed as either

a continuation pattern or a reversal pattern. The triangle
continuation pattern is your typical bearish formation. This
pattern occurs within an established downtrend.

On the other hand, a descending triangle breakout in the

opposite direction becomes a reversal pattern. Considered the
opposite of the ascending triangle, this pattern is also known
as the bearish triangle descending pattern.

A very important fact to bear in mind when trading the

descending triangle is that it is very subjective. Therefore
if you are new to trading the descending triangle stock
pattern, you need to have a lot of practice. Familiarizing
yourself with it in the simulator will allow you to build your
own custom triangle trading strategies.

Characteristics of the Descending

Triangle
The classic version of this pattern forms with a trend line
that is sloping and a flat or a horizontal support line. The
pattern emerges as price bounces off the support level at
least twice. The completion of the pattern occurs after the
end of a retracement in a downtrend.

The downside breakout from the support triggers a strong

bearish momentum-led decline.

However, this textbook pattern seldom occurs in the real

markets. In most cases, a descending triangle pattern can also
see a sloping base as well. Instead of a flat support level,
you can see higher lows being formed.

The illustration below shows an “ideal” descending triangle

pattern, which is often labeled a descending wedge, as well.
Example illustration of a classic descending triangle pattern
Typically, the breakout from a descending triangle is
triggered to the downside. The distance from the support to
the first high is measured. This measured distance is then
projected to the downside where the target price can be set.

However, not all descending triangles breakout to the

downside. You can also see an upside breakout from the
descending triangle. In this case, it becomes a continuation
pattern instead of a reversal pattern.

The same concept of measuring the distance from the support to

the first high is used to determine targets. This is then
projected to the upside for the minimum price objective.

In the next section of this article, we illustrate five

descending triangle trading strategies that can be used.

1. The Descending Triangle Breakout

Strategy
As the name suggests, the descending triangle pattern breakout
strategy is very simple. It involves an anticipation of a
breakout from the descending triangle pattern. This strategy
uses a very simple combination of trading volumes and
asserting the trend, which can be used to capture short term
profits.

The first step in trading this strategy is to pick a stock

that has been in a downtrend or in a consolidation phase. The
time frame of the chart is irrelevant as you can use this
strategy across any time period. Once you have identified a
stock and the time frame, wait for price action to contract.

Be sure to allow for some flexibility in charting the

patterns. Simply watch for lower highs and lower lows being
formed. Once you have identified this price action, the next
step is to draw or chart the descending triangle pattern.

The basic premise of using this strategy is to look at volume

once you’ve identified the pattern. You can typically observe
that volume begins to diminish toward the end of the
descending triangle pattern formation.

The chart below shows an example of the Microsoft (MSFT) daily

stock chart. In the chart, you can see that the triangle
pattern was formed after price action was trading sideways.
After a brief consolidation, price falls lower before breaking
out from the pattern.
Descending triangle pattern breakout strategy
Volumes are usually lower closer to the breakout. Once you
identify the lower volume, simply measure the distance from
the first high and low. Then you project the same from the
breakout area which becomes your target price. We show this
with the dotted lines on the chart above.

This simple volume based descending triangle pattern is easy

to trade but requires lot of time to watch the charts.

2. Descending Triangles with Heikin

Ashi Charts
Using Heikin Ashi charts along with the descending triangle
pattern you can develop a powerful but simple trading
strategy. Heikin Ashi charts visually stand out compared to
the conventional chart types.

One of the main characteristics unique to Heikin Ashi charts

is the fact that they can depict the trend easily. Most
traders often struggle when it comes to identifying the trend.
You can resolve this confusion by switching to Heikin Ashi
charts.

In this strategy, traders simply need to wait for the

descending triangle pattern to be formed. Once the pattern has
been identified, the next step is to wait for the bullish
trend to pick up. In most cases, you will find that the Heikin
Ashi candlesticks turn bullish prior to the breakout. This can
be used as an initial signal to prepare for long positions in
anticipation of a breakout.

The next chart below shows the Heikin Ashi chart for Alcoa
(AA) on the 60-minute time frame. Notice that, prior to the
breakout, the Heikin Ashi candlesticks turn bullish.
Descending triangle with Heikin Ashi candlesticks

Making Price Target Projections

The projections are based on the same strategy as before.
Measure the distance from the first high to the first low and
project the same from the anticipated breakout level.

Wait for the breakout from the descending triangle pattern.

Initiate a long position after the first bullish Heikin Ashi
candlestick. Then, project the measured distance from the
breakout to get the target price.

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.

This descending triangle strategy with Heikin Ashi charts is

effective to trade in the short term.
3. Descending Triangle with Moving
Averages
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.

It is important to note that in this trading strategy we use

the descending triangle pattern to anticipate potential
breakouts. Along those lines, the moving average indicators
serve the purpose of triggering the signal to initiate a
trade.

In the following example, we use a 60-minute stock chart for

General Motors (GM). We use a 10 and 20 period exponential
moving average. Traders can experiment with their own settings
on the period of the moving average; this depends on the time
period that you use. For example, for a daily chart time
frame, you can use the 10, 20 or 20 and 50 period settings.

Also note that using small periods (less than 10) could make
your moving averages more sensitive to noise.
Descending triangle with moving averages
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.

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.

Projections and target price level methods remains the same as

outlined in the initial strategy.

4. The Descending Triangle Reversal

Topping Pattern
You can identify the descending triangle reversal pattern at
the top end of a rally. This pattern emerges as volume
declines and the stock fails to make fresh highs. The pattern
indicates that the bullish momentum is exhausting. At the same
time, price action forms a horizontal support level.

After price bounces off the support level multiple times,

posting lower highs, we can anticipate a potential downside
breakout. The minimum distance that price moves prior to the
breakout is measured from the initial high. This distance is
projected lower after price breaks out below the support
level.

The descending triangle reversal pattern can be very easy to

trade if you spot the pattern ahead of the breakout.

The next chart below illustrates the descending triangle

reversal pattern in play. The stock chart for Morgan Stanley
(MS) shows that after a strong rally, price stalls near the
highs. Notice the support level that also stands out.

The Descending triangle reversal pattern at top

The resulting bounce off the support level leads to a lower
high. 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.
5. Descending Triangle Reversal
Pattern at Bottom
The descending triangle reversal pattern at the bottom end of
a downtrend is the direct opposite of a distribution event. In
this case, you will find that price action stalls at the end
of a downtrend. A horizontal support level marks a bottom in
price.

Multiple attempts to the upside lead to lower highs.

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.

Traders can anticipate a potential upside breakout and trade

the pattern accordingly.

Descending triangle reversal pattern at bottom

In the above chart set up for Goldman Sachs (GS), you can see
how price fell to the lows, establishing support. The
horizontal support level holds the declines where the bounce
off the support level leads to lower highs.

Eventually, price action breaks out from the sloping trend

line. Measure the distance from the horizontal support to the
initial high and project this distance from the breakout
level. The projected distance becomes your target price level.

Tips when Trading the Descending

Triangle Pattern
Subjectivity is essential when trading the descending triangle
pattern. Traders who wait for the “classic” descending
triangle pattern will often find themselves on the sidelines.

Familiarity and experience are the best ways to trade, and

that can only come through practice.

Keep in mind that the descending triangle pattern is also know

as a measured move chart pattern. A measured move chart
pattern is when you measure the distance and project the same
from a breakout.

Many other trading strategies can blend well with

the descending triangle chart pattern. It fits perfectly well
within an investor’s buy and hold strategy. The triangle
pattern also works with technical analysis which can
complement the fundamental analysis as well.

In conclusion, the descending triangle pattern is a versatile

chart pattern which often displays the distribution phase in a
stock. Following a descending triangle pattern, the breakout
is often swift and led with momentum. This can lead to strong
results when one becomes familiar with the trading strategies
outlined.