What is a descending triangle?
A descending triangle is a bearish chart template used in technical analysis that is created by drawing a trend line that connects a series of lower vertices and a second horizontal trend line that connects a series of troughs. Traders often watch for movement below the lower support trend line as this suggests that downward momentum is building up and a breakdown is imminent. Once the outage has occurred, traders take short positions and aggressively contribute to further lower the price of the asset.
Key points to remember
- A descending triangle is a signal for traders to take a short position to accelerate a break down.
- A descending triangle is detectable by drawing trend lines for the highs and lows on a graph.
- A descending triangle is the counterpart to an ascending triangle, which is another trend line chart model used by technical analysts.
What does a descending triangle tell you?
Descending triangles are a very popular chart model among traders as it clearly shows that the demand for an asset, derivative or commodity is weakening. When the price falls below the lower support, it is a clear indication that the bearish momentum should continue or become even stronger. Descending triangles give technical traders the opportunity to make substantial profits over a short period of time. Descending triangles can form a reversal pattern to an upward trend, but they are generally considered to be patterns of bearish continuation.
How to trade a descending triangle
Most traders seek to initiate a short position following a high breakdown of the volume of the lower trend line support in a decreasing triangle chart model. In general, the price target for the chart template is equal to the entry price minus the vertical height between the two trend lines at the time of the breakdown. The resistance of the upper trend line also serves as a stop-loss level for traders to limit their potential losses.
An example of a descending triangle
The chart below shows an example of a descending triangle chart template in PriceSmart Inc.
In this example, PriceSmart Inc. stocks experienced a series of lower lows and a series of horizontal lows, which created a descending triangle chart pattern. Traders would seek a definitive breakdown of the lower trend line support on high volume before taking a short position in the stock. If a failure should occur, the price target would be set at the difference between the upper and lower trend lines – or 8.00 – minus the price of the breakdown – or 71.00. A stop-loss order can be placed at 80.00 in the event of a false failure.
Difference between descending and ascending triangles
The ascending triangle and the descending triangle are continuation models. The descending triangle has a horizontal bottom trend line and a top descending trend line, while the ascending triangle has a horizontal trend line at the top and an upward trend line at the bottom. In addition, the triangles show an opportunity to short-circuit and suggest a profit target, so they are simply different on a potential breakdown. Ascending triangles can also form when reversing towards a downtrend, but they are more commonly applied as a bullish continuation pattern.
Limits of using a descending triangle
The limitation of triangles is the possibility of a false breakdown. There are even situations where trend lines will have to be redrawn when price action breaks out in the opposite direction – no chart template is perfect. If a failure does not occur, the stock may rebound to retest the resistance of the upper trend line before making another move lower to retest the support levels of the lower trend lines. The more the price hits support and resistance levels, the more reliable the chart model is.