DEFINITION of Descending Triangle
A descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a series of lower highs and a second horizontal trendline that connects a series of lows. Often times, traders watch for a move below the lower support trendline because it suggests that the downward momentum is building and a breakdown is imminent. Once the breakdown occurs, traders enter into short positions and aggressively help push the price of the asset even 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 even 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 trendline 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 trendlines at the time of the breakdown. The upper trendline 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 trendline 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 trendlines - 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 trendline resistance before making another move lower to re-test lower trendline support levels. The more times that the price touches the support and resistance levels, the more reliable the chart pattern.