Candlestick patterns are one of the most important tools of technical analysis, this school of trading that believes that history repeats in the stock market – which means they seek out trends in the prices of securities. Candlesticks are rectangular bars that signify the opening and closing prices of a security during a trading session. They are light (or green) when the closing price is higher than the opening price and they are dark (or red) when the closing price is lower than the opening price. They may have lines on either ends to tell an investor what the highs and lows of the security was during a trading period.
What is the descending triangle pattern?
A descending triangle is a bearish candlestick pattern – meaning it foretells the occurrence of a period when the price of a particular security is expected to move downwards. It appears when through two lines – one joining a series of lower highs a second horizontal trend line that connects a series of lows.
It is also sometimes referred to as the right-angle triangle due to its shape. The descending triangle chart pattern is an indicator that sell-side traders are getting aggressive and will take control of the price momentum of the security.
Generally, traders wait till there’s a breakdown in the lower support trend and then take short positions, eventually pushing the price of the security lower.
This candlestick pattern is quite popular with traders as it indicates that the demand for a security is weakening in the capital markets. The descending triangle gives a trader the chance to make substantial gains in a short period of time.
Anatomy of a descending triangle pattern
1. There should be a downward shift in the price momentum of the security before the descending triangle It’s important to note that investors shouldn’t pull out or pour money whenever the pattern appears.
2. It appears when the price of the security is neither continuing nor reversing a larger price trend i.e. when the market is in a consolidation phase with regards to an asset
3. The flat lower trend line in the descending triangle chart pattern should be formed with at least two intermittent lows — while it’s not necessary that they need to be precisely the same, they should be reasonably close to each other. There should be a gap with respect to the time difference when they appear during the trading period.
4. There should be at least two intermittent highs in between the lows to form the descending upper trendline. This feature of the descending triangle signifies that the market is in a consolidation phase where traders will go bearish on the price of the asset. The highs should get successively lower to achieve the descending trendline
5. This when there’s a breakdown in the descending triangle. At this point investors look for a continuation of the downtrend which will in turn confirm the descending triangle.
6. It should not be confused with the ascending triangle which has has a horizontal trend line connecting the highs and an ascending trend line joining the lows
How to trade a descending triangle pattern?
Investors generally wait for the breakdown point before taking a short position in the asset after the descending triangle chart pattern is confirmed. There is a simple measuring technique to gauge a price target so as to make gains. Usually, it is calculated by subtracting the distance between the upper and lower trendlines at the point of breakdown from the entry price.
The descending pattern is most often used as a bearish continuation pattern even though it may appear during the reversal to an uptrend sometimes. This pattern has advantages such as ease of trading and the provision of a clear price target. Traders may also trade the pattern inside the triangle as it’s an intermediate-term candlestick pattern.
There are also two major cons – firstly, even though it’s one of the most reliable patterns, false breakdowns are possible which are followed by a quick price recovery. This could trigger stop losses for traders, and hence hurt chances of making gains. Secondly, there’s a probability that the price of a security moves sideways for a long duration, or even moves higher. If there’s no breakdown but the upper and lower trend lines are being touched again and again, it could be an indicator of a strong descending pattern that’s developing.