Descending Triangle: How to Trade Bearish Continuations

What Is a Descending Triangle?

The descending triangle is a bearish chart pattern that forms when the price action consolidates between a horizontal line and a downward-sloping line.

Unlike some other trading patterns, the descending triangle is considered a continuation pattern, meaning it often signals the continuation of a downward trend rather than a reversal.

How to Identify a Descending Triangle

Identifying a descending triangle on a chart is relatively simple if you know what to look for:

• Support level: Look for a horizontal line connecting at least two or more lows. This line represents the support levels that buyers are defending.

• Resistance line: Draw a downward-sloping line connecting at least two highs. This shows that sellers are progressively pushing the price down.

• Tightening range: As time goes on, the price action should move within a narrowing range between the two lines, forming the triangle shape.

It’s crucial to wait for a breakout below the support to confirm the pattern.

What Does a Descending Triangle Tell You?

The descending triangle typically indicates:

1. Growing selling pressure

2. Weakening of the buyers' defense at the support level

Therefore, it can signal a potential continuation of a bearish trend, especially in markets already on a downtrend. As the price continues to form lower highs, it reveals that sellers are more aggressive, leading to an eventual bearish breakout.

This pattern is helpful in identifying entry points for traders who want to profit from the price's potential downward movement.

By recognizing this pattern early, you can prepare for the likely breakout and adjust your trading strategy accordingly.

The Difference Between Descending Triangle and Other Patterns

Not all triangle patterns behave the same way, and knowing the differences can help you make better trading decisions.

Let's break down how the descending triangle compares to other patterns.

Descending Triangle vs. Ascending Triangle

Think of the ascending triangle and descending triangle as opposites.

A descending triangle shows bearish momentum, which means the sellers are gaining control. In this setup, lower highs press down against a flat support level.

It’s like sellers keep pushing the price down, but buyers are holding their ground at a certain level until they can’t anymore, leading to a potential downward breakout.

On the flip side, an ascending triangle is a bullish continuation pattern. Here, the price is confined between rising lows and a flat resistance line, indicating that buyers are getting stronger.

The market is gearing up for an upward breakout as buyers push the price higher with each swing.

In short, a descending triangle signals that the market might break down, while an ascending triangle suggests it could break higher. One is bearish, the other is bullish.

Descending Triangle vs. Symmetrical Triangle

Now, the symmetrical triangle is a bit vague. Both the support and resistance lines slope towards each other, forming a narrowing price range.

But unlike the descending triangle, this pattern doesn't have a clear direction. It’s a neutral pattern, meaning the breakout could go either way—up or down. The market’s in a state of indecision, waiting for a stronger force to drive it.

On the other hand, the descending triangle is biased towards a bearish breakout. Sellers are steadily pushing the price down, even though buyers are holding the line at support.

So while the symmetrical triangle leaves you guessing, the descending triangle gives you a clearer indication that the market is heading down.

Descending Triangle vs. Falling Wedge

At first glance, the falling wedge might look similar to a descending triangle because both involve a downward price movement. But they tell very different stories.

The falling wedge is usually a bullish reversal pattern. Here, both the support and resistance lines are sloping downward, but the narrowing price range suggests the market is losing downward steam, and a breakout to the upside is likely.

It’s a sign that sellers are running out of energy, and the market may be ready to reverse direction.

However, the descending triangle is more about continuation. The flat support level holds as sellers gradually push the price lower. When the support finally gives way, a sharp bearish breakout typically follows, continuing the current downtrend.

So, while the falling wedge signals a possible reversal to the upside, the descending triangle is often a setup for further downward movement.

How to Trade Descending Triangles  

Now that you understand the descending triangle and how to identify it, let’s explore how to trade it. First, you must understand key concepts such as breakout level, profit targets, and stop levels.

What Is the Descending Triangle Breakout?

The descending triangle breakout is a key moment that shapes your trading strategy.

It occurs when the price breaks through the horizontal support level at the base of the triangle, typically accompanied by increased volume.

This event signals that the sellers have finally overwhelmed the buyers, leading to a strong downward price movement—a bearish breakout.

To put it into a practical example, let’s say a stock is trading between $50 (support) and $60 (resistance), but with each bounce off resistance, the highs get lower—$58, $55, $52, etc. Eventually, the price breaks below $50, signaling the breakout.

How to Confirm the Breakout?

Usually, the breakout is your ideal entry point. However, false breakouts are common so confirmation is crucial.

Remember, not every break below support is a reliable signal. You want to see:

1. Increased volume: A genuine descending triangle breakout is often supported by a surge in trading volume.

2. Closing below support: The price should close below the support level (not just dip temporarily).

How to Choose Profit Targets for Descending Triangles?

Setting a profit target helps you determine how much you stand to gain from a successful trade. For the descending triangle, one popular way to estimate the potential price movement after the breakout is by measuring the height of the triangle.

How to Calculate the Profit Target:

1. Measure the height: The height of the descending triangle is the distance between the initial high (the highest point in the pattern) and the support level.

2. Subtract the height from the breakout point: Once the breakout occurs, you can subtract the height of the triangle from the support level to get an estimated price target.

For example, let’s say the initial high was $60 and the support was at $50. The height of the triangle is $60 - $50 = $10. If the breakout occurs at $50, the profit target would be $50 - $10 = $40.

How to Set Stop Losses When Trading the Descending Triangle Pattern?

While a descending triangle can be a great opportunity for profit, it’s essential to protect yourself from risk by using a stop loss. This prevents large losses in case the trade doesn’t go as planned.

A good rule of thumb is to place the stop loss just above the resistance line of the triangle.

This way you ensure that if the price moves higher and invalidates the pattern, you minimize your losses.

For example, let’s say the resistance line is sloping down from $60 to $55. If the breakout occurs below $50, you could set your stop loss around $55, just above the last lower high.

You can also calculate a stop loss based on a percentage of the stock’s price or your total capital at risk. For instance, if you’re comfortable with a 3% risk on a $50 stock, your stop loss would be set at 3% above or below your entry point.

Lastly, you can also use a trailing stop loss that automatically adjusts based on your position.

Trading Strategies for the Descending Triangle

When it comes to trading the descending triangle pattern, you’ve got several strategies to choose from.

This pattern is well-known for signaling a bearish breakout, making it an excellent opportunity to profit from a falling market.

Let’s explore a few key strategies that can help you trade this pattern more effectively.

Descending Triangles with Heikin-Ashi Charts 

If you're not familiar with Heikin-Ashi charts, they’re a variation of candlestick charts that smooth out price action, making trends easier to spot.

Unlike traditional candlesticks, which show the open, close, high, and low for each period, Heikin-Ashi uses an average of the price movements to reduce noise and give a clearer picture of the overall trend.

For the descending triangle, using Heikin-Ashi charts can be particularly helpful.

Because this pattern forms during a consolidation phase, Heikin-Ashi charts allow you to see the weakening momentum in the up-moves more clearly.

How to Trade the Descending Triangle on Heikin-Ashi Charts

1. Spot the trend: As the price makes lower highs in a descending triangle, the Heikin-Ashi candles often turn red (bearish), showing that the downward trend is gaining strength.

2. Wait for confirmation: When the price breaks below the support level, watch for solid red Heikin-Ashi candles with no upper wicks.

3. Enter the trade: Once the breakout is confirmed, you can enter a short trade.

The smoother price action from Heikin-Ashi charts helps you avoid getting tricked by short-term price fluctuations, allowing you to focus on the bigger trend.

Trading Descending Triangles with Volume

Volume is a critical factor when trading the descending triangle.

A breakout without volume can be a false signal, meaning the price might snap back above the support line and trap you in a losing trade.

But when the breakout is supported by strong volume, it usually means the sellers have taken control and the price is likely to keep moving down.

How to Use Volume with Descending Triangles

1. Look for volume spikes: When the breakout finally happens, a significant increase in volume confirms that the sellers are stepping in forcefully.

2. Wait for a volume confirmation: Before entering a trade, make sure the breakout is accompanied by higher-than-average volume. If the breakout happens on weak volume, it could be a false move. But if you see a volume spike as the price breaks the support level, it’s a strong signal that the price will continue downward.

3. Volume divergence: Another trick is to look for volume divergence. If the price is making lower highs in the descending triangle while volume is slowly rising, it suggests that a breakout is more likely to be significant.

Volume acts as a confirmation tool, helping you avoid false breakouts and giving you more confidence in your trade when the sellers show up in force.

Trading with Support and Resistance

Support and resistance levels are the backbone of the descending triangle pattern, and they play a key role in how you trade it. Understanding how these levels work allows you to make smarter entry and exit decisions.

In the descending triangle, the support level is the horizontal line where the price keeps bouncing.

Once the price breaks below this line, it often becomes a new resistance level. This is a key moment for traders. If the price pulls back after the breakout, it may test this new resistance before continuing its downward move.

This is known as a “retest,” and many traders wait for it to enter a short position with more confidence.

Advantages of a Descending Triangle 

The descending triangle pattern offers several advantages:

1. Clear entry and exit points: One of the biggest benefits of the descending triangle is its well-defined support and resistance levels.

2. Predictable price targets: The height of the triangle can be measured and used to estimate a price target after the breakout. This gives traders a reasonable idea of where the price is likely to head, making it easier to set realistic profit goals.

3. High success rate in bearish trends: In a strong downtrend, the descending triangle is considered a highly reliable continuation pattern.

4. Works in various markets: Whether you’re trading stocks, forex, or commodities, the descending triangle can be applied across different markets.

Limitations of a Descending Triangle

While the descending triangle is a useful pattern, it’s not without its limitations:

1. False breakouts: One of the most frustrating limitations of the descending triangle is the potential for false breakouts.

2. Not always a continuation pattern: While the descending triangle is generally considered a bearish continuation pattern, it doesn’t guarantee a bearish breakout every time. There’s always the possibility that the price could break upward.

3. Limited upside potential: Since the descending triangle is a bearish pattern, it typically leads to a downward price movement.

4. Needs confirmation with other indicators: The descending triangle works best when combined with other technical indicators, such as volume, RSI, or MACD, for added confirmation.

Conclusion

The descending triangle is a bearish continuation pattern. It provides clear entry points, predictable profit targets, and works well in a variety of markets. When used correctly, this pattern can help spot potential bearish breakouts and capitalize on downward price moves.

For additional helpful trading tips and guides, follow XS!