Triangles: A Short Study in Continuation Patterns

descending triangle stock

Two decades of research by Tom Bulkowski show that after a descending triangle pattern is confirmed on a break of either the support or resistance line on higher volume, the price increase averages +38%. TradingView’s powerful pattern recognition algorithms have autodetected this descending triangle pattern. Notice how the bottom support line is not entirely horizontal; this is because there is an element of forgiveness, and not all descending triangles are perfect.

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A false breakdown may occur, or trend lines may need to be redrawn if the price action breaks out in the opposite direction. If a breakdown doesn’t occur, the stock could rebound to re-test the upper trend line resistance before making another move lower to re-test lower trend line support levels. The more often that the price touches the support and resistance levels, the more reliable the chart pattern. Often a bullish chart pattern, the ascending triangle pattern in an uptrend is not only easy to recognize but is also a slam-dunk as an entry or exit signal. It should be noted that a recognized trend should be in place for the triangle to be considered a continuation pattern.

The Descending Triangle Breakout Strategy

This pattern clearly indicates that the market moves higher as the higher lows are formed heading toward the resistance line. During this period of indecision, the highs and the lows seem to come together at the point of the triangle with virtually no significant volume. A double top often looks like the letter M and is an initial push up to a resistance level followed by a second failed attempt, resulting in a trend reversal. The longer the pattern takes to develop and the larger the price movement within the pattern, the larger the expected move once the price breaks out.

  • Descending triangle patterns, therefore, offer insight into the likely direction of a stock, not an exact prediction.
  • The descending triangle can be used to confirm a downtrend, as well as to signal a potential entry point for a short position.
  • The pattern usually forms at the end of a downtrend but can also occur as a consolidation in an uptrend.
  • When a descending triangle is formed during a bear market, it typically signals a continuation of the downtrend.

The descending triangle chart pattern occurs when sellers are in control, but buyers are not willing to let the trend continue lower without putting up some resistance. As buyers become more active and force prices to stay near the same level, the support line begins to flatten out. Eventually, a breakout occurs in either direction, signaling a reversal or continuation of the trend. The triangles are considered to be a continuation chart pattern which means that the prior trend will continue after the formation of this chart pattern. The ascending triangle is formed in an uptrend and indicates the continuation of the uptrend. The descending triangle is formed in the downtrend and indicates the continuation of the downtrend.

There are so many stocks in which this chart pattern is formed and it is difficult for traders to look at the charts of more than 500 stocks for finding this pattern. This indicates the strength of bears and they are willing to sell more for the stock. The breakout of the prices is confirmed when the prices break from the support level with volume and continue to move down. Horizontal or slightly sloped trendlines can be drawn connecting the peaks and troughs between the head and shoulders, as shown in the figure below. Volume may decline as the pattern develops and spring back once the price breaks above (in the case of a head and shoulders bottom) or below (in the case of a head and shoulders top) the trendline. After viewing a strong break below support, traders can enter a short position, setting a stop at the recent swing high and take profit target in line with the measuring technique.

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It only serves an indicative use of information which you may execute in the manner agreed by you. Stock pattern triangles can be either bullish, bearish, or even neutral. Depending on who you talk to, there are more than 35 patterns used by traders. Some traders only use a specific number of patterns, while others may use much more. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

The symmetrical triangle is a neutral formation that relies on the impending breakout to dictate the direction of the next move. For the descending triangle, the horizontal line represents demand that prevents the security from declining past a certain level. It’s as if a large buy order has been placed at this level, and it’s taking a number of weeks or months to execute, thus preventing the price from declining further.

descending triangle stock

While straight lines are used to trace the highs and lows, most likely, if the line truly followed the actual price peaks and troughs, it would be bumpy. ABCL and ABC Companies are engaged in a broad spectrum of activities in the financial services sectors. Any recommendation or reference of schemes of ABSLMF if any made or referred on the Website, the same is based on the standard evaluation and selection process, which would apply uniformly for all mutual fund schemes.

Psychology of the Ascending Triangle

The support trend line continues to close the channel until the resistance price level breaks on heavy volume to resume the prior trend again. The descending triangle reversal pattern occurs when a stock’s price follows a downward trend, forming a series of lower highs and a single lower low. This pattern can be used to indicate an upcoming trend reversal, but it is also important to note that it can also indicate a continuation of the existing trend. That is why it is so important for traders to understand this pattern in order to make informed trading decisions. Since no chart pattern is perfect and analysis is often subjective, using descending triangles has limitations.

descending triangle stock

In this strategy, traders use the descending triangle pattern to anticipate potential breakouts, and the moving average indicators trigger the signal to initiate a trade. Heikin-Ashi charts can apply to any market and are a trading tool used in conjunction with technical analysis to assist in identifying trends. In this strategy, traders watch for the descending triangle pattern to form and wait for the bullish trend to begin using the Heikin Ashi charts. The descending triangle chart pattern can be combined with your preferred trading strategy.

What is the Descending Triangle?

Like with any strategy, you can use the descending triangle pattern to buy/sell stocks by knowing when to enter, take profits, and cut your losses. As we mentioned above, the simplest way to use this pattern is to buy the breakout of the triangle. After a breakout from a descending triangle, the target price is calculated by measuring the widest distance of the pattern and subtracting it from the breakout point at the resistance line. This provides an estimate of where the price could potentially go, but it’s important to remember that this is just a guideline and other technical analysis factors should be taken into account. As a descending triangle pattern develops, volume usually contracts.

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As the price drops downward from the horizontal resistance level, buyers begin to show their resolve, and the price fails to reach the recent low, with the trend turning upward once again at a higher swing low. In other words, the upward-sloping trendline that forms the lower boundary of the ascending triangle is acting as support—the level where buyers jump in and prevent the price from falling any lower. When trading the descending triangle, traders need to identify the downtrend and this can be seen in the EUR/USD chart below. Thereafter, the descending triangle appears as the forex candlesticks start to consolidate.

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You only have to check if the Chaikin Money Flow line has spent more time below the zero line during the time the descending triangle emerged. The same charting pattern used one day can produce completely different subsequent price movements compared to using the pattern on another day. Said another way, charting pattern identification is often the result of experience – the more you trade, the better you become at identifying patterns. Over time, your ability to discern where the line should be placed will improve through repetition. The information provided on or through the Website is for general guidance and information purposes only and they do not in any manner indicate any assurance or opinion of any manner whatsoever. Any information may be prone to shortcomings, defects or inaccuracies due to technical reasons.

  • IU offers 3 trading courses with a track record of transforming brand-new traders into full-time trading professionals.
  • The reversal chart pattern emerges as the buying activity declines and the market fails to make fresh new highs.
  • To qualify as a descending triangle, the formation must meet several conditions.
  • Because the ascending triangle is a bullish pattern, it’s important to pay close attention to the supporting ascension line because it indicates that bears are gradually exiting the market.
  • As we stated before, this chart pattern operates on a one-minute chart, a five-minute chart, all the way up to higher time frames.

Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealeror an investment adviser.

Price Target

Instead of focusing on a static and random profit target, we’re going to use the dynamics of the price action to obtain more accurate profit targets. In this case, we’re going to be looking for the flat bottom to get conquered by the bears. The potential support breakout can signal a powerful trend reversal.

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