DEFINITION of 'Descending Triangle'

A descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second horizontal trend line that has connects a series of lows. Often times, traders watch for a move below the lower support trend line, as it suggests that downward momentum is building and a breakdown is imminent. Once the breakdown occurs, traders enter into short positions and aggressively push the price of the asset lower.

BREAKING DOWN 'Descending Triangle'

Descending triangles are a very popular chart pattern among traders because it clearly shows that the demand for an asset is weakening, and when the price breaks below the lower support, it is a clear indication that downside momentum is likely to continue or become stronger. Descending triangles give technical traders the opportunity to make substantial profits over a brief period of time.

Most traders look to initiate a short position following a high volume breakdown from lower trend line support in a descending triangle chart pattern. In general, the price target for the chart pattern is equal to the entry price minus the vertical height between the two trend lines at the time of the breakdown. The upper trend line resistance also serves as a stop loss level for traders to limit their potential losses.

A descending triangle is the bearish counterpart of an ascending triangle, which is one of the most reliable bullish chart patterns used by technical analysts.

Descending Triangle Example

The chart below shows an example of a descending triangle chart pattern in PriceSmart Inc.

In this example, PriceSmart Inc. shares have experienced a series of lower highs and a series of horizontal lows, which created a descending triangle chart pattern. Traders would look for a definitive breakdown from the lower trend line support on high volume before taking a short position in the stock. If a breakdown did occur, the price target would be set to the difference between the upper and lower trend lines - or 8.00 - minus the price of the breakdown - or 71.00. A stop loss order may be placed at 80.00 in the event of a false breakdown.

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 times that the price touches the support and resistance levels, the more reliable the chart pattern.

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