The descending triangle is the opposite of the ascending triangle.
The bottom of the descending triangle is usually a flat level of support with the upper side sloping downwards as the price makes lower highs. This pattern can signal weakening support and an approaching breakout to the downside. These lower highs indicate that the bears are gaining strength which presents you with a possible selling opportunity.
This lesson will show you two ways to trade using descending triangles.
Identifying a descending triangle pattern
The chart below shows what a descending triangle pattern looks like:
Trading a descending triangle: method one
The first way you can trade this pattern is to enter once the support level has been broken and the price starts to move to the downside. You can wait for a candle to close below the support level before looking to go short.
The stop loss is placed above the down sloping side of the triangle pattern and you can then measure the profit target by taking the height of the back of the descending triangle and extending that distance down from the breakout.
The chart below demonstrates where to place the entry (orange), stop loss (red) and take profit levels (green):
Trading a descending triangle: method two
The second way to trade a descending triangle is to wait for the price to break below the lower support line, as in the first example and then look to place a sell order on the retest of the support level (broken support now becomes resistance).
The stop loss would go above the new resistance area and the profit target would remain the same as in the first example.
The chart below demonstrates the second way you can trade the descending triangle pattern. It shows the entry, stop loss and take profit levels:
- The entry is made once the price breaks through the support and comes back up to test the old support level as resistance. The price find resistance (although a little bit higher than the old support level) and the price starts to go back down.
- The stop loss in placed above the resistance level at which the price reversed.
- The profit target goes the same distance away as the back of the triangle, down from the entry.