What the Descending Triangle Shows Us
As illustrated below, the descending triangle is a bearish continuation chart pattern. The price action trades in a clear downtrend, as there is a series of the lower lows and lower highs. The sellers, who are in control of the price action, take a temporary pause to consolidate their most recent gains before extending the downtrend lower.
Descending triangles usually take place in a mid-trend, as there is a first part of the trend - the start of a downtrend, while after the consolidation phase there is a continuation of the overall trend. Therefore, the descending triangle is usually in the middle of a bigger trend that helps the sellers to extend the downtrend.
Source: Daily FX
Consolidation of the price action takes form in the context of a descending triangle. Two trend lines, that connect the lower highs and the horizontal support, converge until they intersect. The narrower the space between the two lines is, the stronger the breakout usually is.
There are three key features of a descending triangle:
- Strong trend - In order for the descending triangle to exist in the first place, the price action must stem from a clear downtrend;
- Temporary pause - This element refers to the consolidation phase, which will help the sellers to consolidate their strength;
- Breakout - The break of the lower flat line marks the breakout, which activates the pattern. It also helps us determine the entry, take profit, and stop loss at a later stage.
Given that the descending triangle is a bearish formation, the likelihood of the trend continuing lower is higher than the chance of a reversal taking place. In this regard, the descending triangle acts as a conductor, or a tool for the sellers to help extend the downtrend.
Even the most aggressive moves in trading don’t occur in the vertical fashion. The dominant side, in this case sellers, need some breathing space to regroup for another push lower. These temporary pauses can take different forms, with the descending triangle being one of them.