What is a Descending Triangle Pattern?
A Descending Triangle is a bearish chart pattern that is a signal for traders to take a short position when the price dips below the support and downtrend. Downside momentum is likely to continue or become even stronger. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically marked off as continuation patterns. Descending triangles are inherently bearish patterns by nature that indicate distribution.
How to Identify a Descending Triangle Pattern
The descending triangle is a fairly easy chart pattern to spot once you know what you’re looking for, here are the five (5) key points:
- Downtrend: The market must be in a downtrend before the descending triangle pattern appears. This is important and emphasizes that traders should not simply trade the pattern whenever the descending triangle appears.
- Consolidation: The descending triangle then appears while the market enters the consolidation phase
- Upper Trend line: While the market is consolidating, a downtrend can be drawn by connecting the highs. The downtrend indicates that sellers are pushing the price down, which confirms the bearish bias.
- Lower Trend line: The lower trend line acts as support. Price often approaches this level and bounces off until the breakout eventually occurs.
- Trend Continuation: After price posts a strong break below the lower trend line, traders will look for confirmation of the pattern by continued downwards momentum.
Trading a Descending Triangle Pattern
Looking at the 1-hour time frame of XRP (Ripple) we can see a pretty evident descending triangle pattern. This descending triangle is formed off of bearish momentum by the first two inflection points, creating the downtrend after bouncing off of a support level. The price is then squeezed between these two lines, forming a wedge, until it breaks out for good to the downside and continues its bearish momentum downwards.
Looking at the daily time frame of GE (General Electric Co.) we can see a clear as day descending triangle. This pattern was formed initially by this level of support and downtrend, both forming new support & resistance touches of these levels before the price was squeezed too close together and broke out to the downside. For about an entire year, the price of GE was consolidating in between these two lines in this wedge before it broke out to the downside.
Differences Between the Ascending Triangle and Descending Triangle
Although the ascending and descending triangle both represent the price being wedged in between a level of support/resistance and a trend line before a breakout, they are actually the exact opposite of each other.
Hence the name ascending triangle, the price of the asset is ascending before it breaks out to an even higher trading price. It is squeezed together between an uptrend and a level of resistance. The ascending triangle represents bullish momentum and a breakout to the upside is expected.
The descending triangle squeezes the price of the asset between a level of support and a downtrend before it breaks out to an even lower trading price. The descending triangle represents bearish momentum and a breakout to the downside is expected.
Limitations of Descending Triangles
Although ascending triangles appear to be pretty solid in terms of direction of the momentum of the asset, you shouldn’t trade solely based off of this one pattern. As a trader, you need to take into consideration where in the market this pattern appears and on what time frame. The higher the time frame and end of an uptrend sell off, the more respected this pattern is.
