Descending Triangle Pattern: What It Is and How to Trade It?

A detailed analysis of the stock before investment often works for traders to pick the right stocks and decide upon the appropriate time to invest in them.Every trader is keen to invest in promising stocks and exploit investment opportunities to maximize their investment return. Apart from the fundamental analysis of stocks, technical analysis also plays a vital role in evaluating investments and figuring out trade opportunities. Based on price movement, volume, and other trading activities, the technical analysis helps the traders and analysts in estimating the overall value of a security or stock.Let's look at the descending triangle chart patterns- one of the popularly employed statistical trends while analyzing a stock.

The descending triangle exhibits a bearish chart pattern generated by an upper and lower trendline. The upper trendline descends (connecting consecutive lower highs) while the lower trendline is flat (connecting consecutive lows), forming a triangle pattern. The pattern is completed when the price breaks out of the descending triangle and follows the overall trend direction.For Example, look at the following descending triangle chart pattern:Here, the descending triangle pattern can be easily identified with a lower horizontal trendline and an upper falling trendline, together forming a descending triangle. The base is the vertical line drawn from the flat trendline to mark the start of the descending trend. The descending triangle pattern here indicates that the buyers are not as aggressive as the sellers, and hence the price continues to generate lower highs. This shows that the demand for the related commodity/security is falling.The breakpoint is reached when the price falls out of the triangle and moves to follow the overall trend, which is generally downwards. This indicates that the current downward trend is likely to go down even further.

Below factors must be kept in mind while trading with the descending triangle pattern:

• The trend before the triangular pattern must be downwards.
• The prices must go down further after the breakout point at the horizontal support line.

Some of the strategies that can be used while trading a descending triangle are:

• Enter the trade when the breakpoint has been reached and prices continue to fall. You can consider going short once a candle closes below the breakpoint. The stop loss may be placed above the descending slope side of the triangular pattern. The profit targets can be measured by considering the height of the back of the triangle and extending the distance from the lower breakout point.
• When the horizontal line of support breaks, it turns into resistance. The stop loss will now go above this resistance area. Another way to trade a descending triangle is to enter once the prices break through the horizontal support line and come back to retest the new resistance.

While the descending chart pattern offers many advantages, including ease of identification and a clear indication of the target level based on the maximum height of the descending triangle, it has a major drawback too. There is always a possibility of false breakouts that can make the downtrend reverse the pattern. Also, there are chances that sideways movement of prices happen for a longer period or may even go higher. Keeping these facts in mind, the traders must do risk management as required.The descending triangle pattern is a counterpart of the ascending triangle chart pattern that offers investors an opportunity to generate substantial returns in a limited period. Though the descending triangles are bearish patterns that are continuous but sometimes they may form as reversal patterns at the end of an uptrend. Hence, you must be able to identify the descending triangle pattern before exploiting the trade opportunities.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.