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Descending Triangle Pattern

Decending Triangle Pattern

Descending Triangle Pattern – The descending triangle is generally considered to be a bearish pattern that indicates distribution and is usually found during down trends (see Figure 1 and Figure 2).

Figure 1 Descending triangle in a down trend — bearish.

Figure 2 Descending triangle showing apex, pattern height and breakout.

It is the bearish counterpart of an ascending triangle.

A descending triangle is formed when the price makes lower highs but the lows keep occurring at the same price level due to support. The odds favor a downside breakout from a descending triangle.

Unlike the ascending triangle, the bottom part of the descending triangle appears flat while the upper part of the triangle has a downward slant. Prices typically drop to a point where the security becomes oversold.

Tentative buying comes in at the lows, and perks the price up. The higher price, however, attracts more sellers and the price re-tests the old lows. Bulls then again tentatively re-enter the market as a last attempt to gain control. The resulting higher prices, however, once again attract even more selling. Bears are now in control and push the price down below the earlier lows of this pattern, while the previous buyers then hasten to exit their positions.

As in the case of the ascending triangle, volume tends to diminish during the formation of the pattern — and then increases on its break down. This is a very popular tool among traders because a descending triangle shows that the demand for an asset is weakening. When the price breaks below the lower support, it is a clear indication that downside momentum is likely to continue
— or become even stronger.

Descending triangles give technical traders the opportunity to make substantial profits over a brief period of time. The most common price targets are generally set to equal the entry price minus the vertical height between the two trend lines.

Descending triangles also offer investors the opportunity to exit a stock in good time.

Descending triangles offer good short term opportunities for traders to short sell the stock and also provide investors opportunity to move out of a stock in time to avoid further losses.

Figure 4 : Minor reversal of ACC depicted by a descending triangle. You should also note the head and shoulders formation which developed within the triangle.

Bata India (BI) reversed its up trend by developing two descending triangles on its daily chart in Figure 5 BI made a false upward move in late December 2006, trapping some new buyers in the process. Informed investors took this opportunity to offload their holdings — a classic case of planned distribution. Look at the breakdown of the horizontal line in February 2007. When the price dipped sharply, BI made a pull back attempt to touch the support line (now acting as resistance), failed to do so, and went on to make a series of lows with occasional gap down openings.

Figure 5 Reversal of up trend after the formation of descending triangle.

In trying to decide whether a triangle on a daily chart is likely to lead to an upside or a downside breakout, look also at the weekly chart. If both weekly and daily charts show the same trend, then the breakout is likely to be in that direction. Thus if the weekly chart is up, then a triangle on the daily chart is more likely to break out to the upside — and vice-versa we can again take the example of Bata India and look for the pattern in its weekly chart.

Weekly charts are particularly useful for detecting confirmation of both major top reversals and major bottom reversals. Two descending triangles can be seen on this weekly chart of Bata. Like in its daily chart, in this weekly chart too, the price is coming down so the possibility of the price breaking down is more likely. Bata India confirmed this downside reversal on this weekly chart.

Descending Triangle Pattern

How to Trade Ascending and Descending Triangles

Ascending and descending triangle patterns respectively indicate that the demand for a security is increasing, or decreasing. The price touches the level of support or resistance (the horizontal trend line) several times before breaking out and signaling a reversal.

Ascending and descending triangles are favorites of short term traders because these patterns allow them to earn from the same substantial price increase that long term investors wait for. The significant difference is that an understanding of these triangle patterns afford technical traders the opportunity to make substantial profits in a short period of time.

Should you take short term opportunities, or should you be an investor and wait for years to benefit from such moves? This is the biggest dilemma that each one of us has to resolve for ourselves. Investors keep holding on to a stock for months or years before they finally see a big pay day, but shrewd traders can spot these chart patterns and then buy / sell or hold for only a period of days and reap the same windfall returns as do long time investors after a long wait.

Descending Triangle Pattern

Some traders use oscillators such as stochastic to catch minor swings. But ascending and descending triangle patterns are so clear that they can be traded based on their formations and volume:

You must place a protective stop slightly inside the triangle once you are in a trade. It has been observed that prices sometimes tend to pull back to the wall but they should not return deep inside a triangle following a breakdown.

You should also pay attention to volume when a breakout from a triangle is followed by a pullback because a pullback on heavy volume offers a good opportunity to add to your position. You must cancel your buy or sell orders when prices approach the last third of a triangle, as breakouts from the last third of the triangle pattern are very unreliable.

Descending Triangle Pattern

Once you learn to identify ascending and descending triangles, as indeed other important patterns, you can profit from upward or downward reversal breakouts. That way you’ll earn a healthy profit regardless of which way the market is going.

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Descending Triangle Pattern

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