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Descending Triangle Stock Chart Pattern

Descending triangle stock chart patterns are a common formation that technicians use. When used properly a descending triangle helps to identify profitable shorting opportunities. Used improperly, they will lead to losses. Investors use the descending triangle to identify opportunities to short a stock or an index.

Descending Triangle Chart Pattern Definition

A descending triangle is defined by technical analysts as having support at a lower horizontal trend and an upper descending trend that offers resistance. The two trends form a triangle.

When the price falls to the same level at least twice, the lower horizontal trend is created. As in many support areas, the price should come close to the support level though it does not have to actually touch it. It also can fall slightly below this level as well. This support level is created by sellers who wish to close their stock but are reluctant to sell at a lower price. they are hoping to close their position on a move up. Without the additional selling the price rises. Each time the buying volume stops at a lower high as those who want to sell start entering orders overcoming the buying action. Each rise in the price encounters additional selling pressure at a lower high as those who want to sell the stock decide the current price will work for them. These lower highs form the descending trend.

You should see at least two price rises creating progressively lower highs to create the descending trend. similar to the horizontal support, the price does not have to actually touch the descending trend, though it should come close.

Since buyers tend to stay on the sidelines, volume should slacken as the descending triangle pattern forms. The break below the horizontal trend is a signal to go short. Such a break does not have to be accompanied by higher volume. The stock can fall on lower volume as long as buyers stay on the sidelines. A volume spike on a break down indicates sellers are bailing out of the stock and it is likely to fall further.

For the descending triangle stock pattern to work properly, breaks through support should take place more than half way through the formation of the triangle and before reaching its apex.

Re-tests of the horizontal support level will provide investors another opportunity to short the stock. In the example of the NASDAQ, the re-test pushed up through the horizontal trend and then turned down before reaching resistance of the descending triangle.

Descending triangle chart example

How to trade a Descending Triangle Chart Pattern

A break down through support of the horizontal trend is a sign to short the stock or index. In some cases we will see above average volume on the break as additional investors start to sell. However, higher volume is not necessary for the price to fall further. If the volume is at or below average and the price breaks down, it is likely the buying pressure has diminished. This allows any sellers to push the price of the shares further down.

Investors should look to short on the initial break. Some investors will wait for the re-test to short the stock. Their thought is a re-test, if it takes place offers a lower risk entry as it further proves there is a lack of buyers. You cannot count on a re-test every time, so you might miss out on a good short signal.

The measured rule can be used to estimate how far the price is likely to fall when trading the descending triangle pattern. for a bearish formation, the measured rule calculates the difference of the horizontal trend of the descending triangle and the high point of the descending trend that has been acting as resistance. Subtract this difference from the horizontal trend to calculate the exit target. In the sample chart above The difference is 2700 - 2200 = 500. Subtract 500 from 2200 and you have a target of 1700. Many traders use this price target to capture their initial profit by selling half of their position. Their strategy is to use this money for other investing opportunities, while letting the remaining half fall further should it do so. They move a trailing stop down to a support level that is below the break, so they are assured of a profitable trade on this half as well.

Risks using Descending Triangle Chart Patterns

Descending triangle stock chart patterns work best when the investor shorts the index of the stock at the break down through horizontal support. Entering before the price breaks down increases the risk of a experiencing a premature break to the upside.

Premature breaks can take place either to the up side of down.  If the price rises through through resistance before the descending triangle pattern fully formed it is a sign of a premature break. In addition the price can fall through support before if has meet the definitional rules, negating the rules of the pattern. One of the problems of the descending triangle pattern is it subject to failures of this sort. Investors should use caution when they think a descending triangle is forming waiting to be sure it meets the rules before using the pattern to make a trade decision.

There is a tendency to declare a stock pattern is a descending triangle, even when it does not achieve the guidelines. when this takes place, the pattern is more likely to disappoint investors. do not be tempted to declare a pattern as a descending triangle before it complies with all the criteria. Stock chart patterns are designed to help investors lower the risk of their trading actions. There is no reason to offset to advantage of a descending triangle chart pattern by declaring it prematurely. Should the stock price violate the rules of a descending triangle pattern, look to see if other patterns are forming such as an inverse head and shoulder bottom or descending channel.

The descending triangle stock chart pattern does not occur very often. When it does form, it provides you with a high probability of a profitable trading pattern that you should add to your investing tool kit.


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