Table of Content

Descending Triangle Pattern: Continuation or Reversal?

Gain insights on trading the Descending Triangle Pattern in financial markets.

 Dear friends,

Price movements in financial markets may not always be predictable due to their complex nature. In this chaotic environment, technical analysis has become an indispensable tool. This enables us to gain information and foresight about price movements. In financial trading, knowledge is power and can assist us in making informed decisions. Chart patterns in technical analysis play a key role in this regard. In this article, we aim to introduce you to the "Descending Triangle" pattern and demonstrate how to trade using this pattern with real examples.

What is the Descending Triangle Pattern?

The Descending Triangle is a neutral pattern type that can be seen in both bullish and bearish trends. When this pattern appears, it can be predicted that either the current trend will continue or a trend reversal may occur. The continuation or trend reversal signal it provides depends on the breakout direction in line with the trend in which it forms. So, when the Descending Triangle appears in a downtrend, a downward breakout indicates a continuation of the decline, while an upward breakout signals a reversal. If it emerges in an uptrend, an upward breakout is seen as a continuation of the upward trend, while a downward breakout is considered a reversal. Accordingly, the Descending Triangle is a neutral chart pattern. The trend can change depending on the trend in which the pattern forms and the direction of the breakout.

A picture of a Descending Triangle chart pattern showing breakout and breakdown.
The Descending Triangle Pattern

How does the Descending Triangle Pattern Form?

While forming a Descending Triangle, it creates an expectation among many traders that the downtrend will continue. However, the opposite scenario can also occur, as I mentioned earlier, where the breakout direction plays a critical role. Generally, it is assumed that the downtrend will continue. When the Descending Triangle pattern is seen in the market, the following elements complete the pattern structure:

  • Falling Upper Line: The falling (descending) upper line is a downward sloping line that connects a series of downward peaks. This slightly downward sloping upper line, forming the top part of the pattern, usually indicates a downtrend in prices. This line is drawn based on previous price movements and acts as a resistance line.
  • Flat Lower Line: This line is a horizontal straight line that connects a series of bottom points. It is considered a support line because prices do not fall below this line during the pattern formation. This horizontal support line, forming the bottom part of the pattern, indicates that prices may fall to a certain level.

The price fluctuations between the two imaginary lines mentioned above create a triangular appearance. While the upper part of the triangle slopes downwards, the lower part looks like a flat line, and these lines are appropriately known as resistance and support lines. The triangle-shaped formation of the pattern reflects that the balance between buyers and sellers has not yet been disrupted.

How to Trade the Descending Triangle Pattern?

When trading with the Descending Triangle pattern, we should anticipate a clear breakout of the price from the triangle formation in one direction. This breakout point is generally considered a selling or buying signal and is viewed by traders as an outstanding trading opportunity. It's important to pay attention to how the price breaks the trend lines. A breakout with volume is considered a stronger signal. A high-volume breakout indicates a more reliable signal. On the other hand, a low-volume breakout suggests a weaker signal and a higher probability of reversal. Also, Descending Triangle patterns can form over different time frames. Longer-term Descending Triangles are considered stronger signals. When the price breaks the upper line of the pattern up or the lower line down, we can place trade orders.

Short position with Descending Triangle pattern:

After the pattern formation, it's mostly expected that the price will experience a downward breakout. If the price breaks the lower flat line of the pattern (support line), this usually signifies increased selling pressure and further downward movement in price. The volume at this breakdown point should be taken into account. This breakdown can be considered a sell signal, and opening short positions at this point may be preferred.

  • Entry (Sell): When opening a sell position, it can be based on the breakdown point or pullbacks after the breakdown.
  • Stop Loss: The Stop loss level is usually set slightly above the breakdown point.
  • Target: The target price can be equal to or twice the height of the pattern (distance between support and resistance).

The following chart shows a trading example based on the Descending Triangle pattern on the 4-hour chart of the Euro/Swiss Franc (EUR/CHF) pair. In this trading example, prices broke the flat bottom line, experienced a pullback, and then continued to decline:

This image showing Descending Triangle pattern with price breakdown, pullback, and decline on the EUR/CHF 4-hour chart.
Descending Triangle Trade Example on EUR/CHF

Long position with Descending Triangle pattern:

If the price breaks above the descending upper line of the pattern (resistance line), it can be a signal to place a buy order. However, it's better to look at other technical indicators to confirm this signal. Confirmation of the breakout occurs when a candle closes above the line with a full body. Additionally, after the breakout, prices may pull back to test the line. In this case, a long position can be taken as prices resume their upward movement.

  • Entry (Buy): When opening a buy position, a clear breakthrough of the breakout point or the end of the pullback is expected. The pullback after the breakout can present attractive prices for entering a buy position.
  • Stop Loss: The stop loss order is usually placed slightly below the breakout point.
  • Target: The target price is determined based on the height of the pattern (distance between support and resistance) and can rise up to this value or double it.

The following image shows an example trade based on the Descending Triangle pattern on the 4-hour chart of the Spot Gold/US Dollar (XAU/USD) pair. In the chart, prices broke above the upper descending line, experienced a pullback, and then continued their upward movement. In this case, you would consider the Descending Triangle pattern as a continuation pattern:

XAU/USD 4-hour chart showing Descending Triangle Pattern with price breakout, pullback, and upward movement.
Descending Triangle Trade Example on XAU/USD

Always Remember: The Forex market involves high risks and the possibility of experiencing losses. It should never be forgotten that chart patterns may not always provide accurate signals when used alone. The Descending Triangle pattern can also give false signals and be misleading. Therefore, it's essential to evaluate chart patterns in technical analysis along with other analytical methods and continuously observe market conditions.

Post a Comment