CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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The Descending Triangle Candlestick Chart Pattern 

The descending trendline is a bearish candlestick formation that occurs in a mid-trend. It usually takes place in a downtrend, and it signals that the impending breakdown will continue the overall downtrend.


Similarly to the ascending triangle, the bearish triangle pattern consists of two simple trend lines that connect the lower highs and the horizontal support.

 

In this blog post we will discuss how the descending triangle is created, what the message that the market sends is, as well as share tips on a simple, but effective trading strategy based on descending triangles.

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.

 

Descending triangle - an illustration (Source: Daily FX)

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.


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.

Strengths and Weaknesses

The descending triangle shares the same set of strengths and weaknesses as the ascending triangle. As outlined earlier, it helps us define the trading environment as two trend lines provide us with levels to play against. 

Although a failed break of the triangle to the downside can always happen, the likelihood of the trend continuing in the same direction is always higher than the reversal. For this reason, descending triangles are an effective tool that helps us better position our entry, take profit, and stop loss

Contrarily, the failed breakouts are the biggest weakness of a descending triangle. The price action may breakout, and even close below the lower trend line, but still return to the inside of the triangle. In order to minimize the chance of a failed breakout, it is always advised to consult other technical indicators and confirm the breakout e.g. volume, RSI etc.

Spotting the Descending Triangle Pattern

We said earlier that the descending triangles usually occur in the mid-trend, as this helps extend the downtrend. In the chart below, EUR/USD trades lower in a continuous manner. You see that after a series of the lower lows, the price action makes two equal lows, allowing for the supporting trend line to be drawn. 

Still, the sellers do not allow the buyers to break the series of the lower highs, which continues until the two trend lines come close to intersecting. Just before this happens, the sellers are successful in breaking the triangle to the downside, therefore securing a continuation of the downtrend.

 

the descending triangle on EUR/USD hourly chart

 

Spotting the descending triangle is very straightforward and easy. The first step should be associated with identifying the downtrend. After that, you should be looking for at least two equal, or close to equal, lows that help draw the flat supporting line, while the opposite trend line should be extending lower to reflect the lower highs. 

It is important to note that the lower trend isn’t always completely flat, as it is difficult to expect precise levels from volatile markets. As long as the lower trend line is nearly flat, we consider it legitimate. The break of this line marks the activation of the descending triangle pattern and the moment when we consider entering the market to capitalize on the next leg lower.

Trading the Descending Triangle Pattern

One of the biggest advantages of the descending triangle pattern is that it helps to format our trade as the breakout nears. A break of the supporting line activates the pattern and offers us two options for entry, as it is the case with all candlestick chart patterns.

 

We can either dip into the market immediately after the breakout candle closes, or wait for a potential throwback. We see that in this case the throwback - a retest of the broken trend line - never occurred. Hence, the end result proved that we only had a single chance to capitalize on the move lower.


the descending triangle on EUR/USD hourly chart

 

Hence, the black horizontal line reflects the entry taken immediately after the breakout candle on the hourly chart closed. We said earlier that a move back to the inside of the triangle signals a failed breakout and invalidates our pattern. For this reason, we place the stop loss above the broken trend line to protect our capital and limit potential losses. 

The take profit is measured by calculating the distance between the two trend lines when the triangle was first formed. The same line is then copied from the level where the breakout occurred, while the other end of the trend line signals a level where the pattern is completed.

In our case, the take-profit order (the green line) was hit quite quickly as the sellers moved the price action lower without much resistance from the buyers. Finally, we booked 125 pips while we risked 45 pips on the other hand, which makes a very profitable R:R ratio of almost 1:3.

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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