Descending triangle is one of the most popular chart patterns. It helps to profit from explosive breakouts if traded correctly.
What is a descending triangle, and how is it formed?
The descending triangle is a bearish chart pattern that shows the sellers are in control. It looks like a series of lower highs coming into an area of support. A triangle is considered to be forming when it makes at least five touches of support and resistance.
For example, three touches of the support line and two of the resistance line or vice versa.
As the price drops lower, there’s still a lack of buying pressure. Instead, sellers are willing to sell at even lower prices. Thus, we get a series of lower highs.
The descending triangle is also known as the perfect bull trap. Many retail traders buy assets when the price hits support and set their stops below.
As a result, the cluster of stop loss builds up.
Since the market moves from one area of liquidity to the next, the price will likely break below the support zone and trigger those stops. Once it happens, the selling pressure increases very significantly.
How to trade descending triangle breakout?
Generally speaking, the best way to trade the descending triangle is to go short when the price breaches support. However, there are essential rules to remember if you want to find the most reliable breakout trades.
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The support should be tested multiple times. There is a clear logic: multiple tests attract more buyers and increase the number of stop orders below the support. This is great for the short-sellers because if the price breaks below support, the stop orders get triggered. It increases the selling pressure towards the downside.
Descending triangle trading strategy
Enter only after the price breaks below support. This way, you will not be stuck in a long consolidation. The best range to set your stop loss is above the high of the pattern.
If you missed the entry, do not chase the market and wait for the retest. If the breakout is accurate, the previous support should turn into resistance. In other words, you get a tighter stop loss and a better risk/reward ratio. However, don’t blindly place a sell limit order to get the highest possible winning rate trading descending triangle. As I mentioned above, the breakout could be false. So, wait for the price rejection before shorting.
This can appear as reversal patterns like Shooting Star, Bearish Engulfing, etc. If the price was rejected, you can go short on the next candle and have your stop loss above the swing failure.
However, if the breakout is very aggressive and we see the panic in the market, there might be no retest. The good news, you still can find an entry. In this case, wait for the tight consolidation to start after the breakdown. Sometimes it looks like a bear flag.
For this entry, the pullback should be shallow and shouldn’t go past the 20 Moving Average. The good thing about it is your stop loss is tighter, which gives you an excellent risk/reward.
Moreover, the shallow pullback tells you the sellers are in control, and the next move lower can be fast. With this strategy, you can place a sell stop order below the swing low. In this case, your stop loss should be above the swing high of the consolidation zone.
How to set targets and exit?
There are two best ways to exit your descending triangle trade.
The first is to set your target and close the trade once the price reaches it. To set the target, follow two simple steps:
- Measure the distance between the high and low of the descending triangle
- Take the distance and project it at the breakout point to get your target
The second is the trailing stop. Unlike the first technique, a trailing stop loss doesn’t use a fixed target profit but is suitable for conservative traders. In other words, you trail your stop loss as the price moves in your favor.
You can use moving averages to help you set the correct trailing order. Note, 20MA should be used for short-term, 50MA for medium-term, and 100MA for long-term trends. Close your trade when the price closes above the moving average.
The descending triangle is a bearish chart pattern that shows sellers are in control. Thus, we can expect lower prices. The more times the price tests support the triangle, the greater the chance of a significant breakdown. If you missed the breakdown of the pattern, look for the retest of the breakout point or tight consolidation.
Descending Triangle Pattern – The Easiest Strategy To Trade It by Inna Rosputnia
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