In the varied and colorful ocean of forex technical analysis, the descending triangle is one of the most sought after fish. As the name suggests, it takes the form of a triangle that is in a descending form. The way the descending aspect is formed is by a trend line that is horizontally made up of a number of lows and also a falling trend line which is also made out of a bunch of lows.
So as you might have been able to guess, a descending triangle is a bearish pattern. It is also regarded to be among continuation patterns, since the price break out will usually follow the trajectory of the triangle, i.e. a downtrend or the continuation of the bearish movement.
Though, keep in mind that like any other pattern, a reversal is also possible. so it is essentially a possibility that a bullish trend could come out of the descending triangle.
In this article, we want to focus on this particular technical indicator and find out all about the descending triangle.
What Can You Learn from the Descending Triangle?
Because the continuation pattern of the descending triangle is a bearish pattern, then this indicator usually informs traders that they should take a short (sell) position because of the fact that prices will further decrease.
Much like the ascending triangle, the descending triangle is also drawn with the help of highs and lows that are drawn in order to form two important lines: one of them is the horizontal line, and the other one would form the descending part of the triangle.
Of course, the important difference between the ascending and descending triangle is that they signal two opposing trends that are forming in the market. The former being a bullish one and the latter being a bearish one.
So in essence, they can help traders identify the momentums and trends in the market so that they have a great chance to benefit from such opportunities.
Of course, the momentum that is signaled by the descending triangle is a bearish momentum. So when traders use this indicator and the pattern is formed, they know that they should take a short position.
How Can the Descending Triangle Be Drawn?
In general, and in technical analysis, we have three different forms of triangle patterns – namely ascending triangle, descending triangle, and symmetrical triangle.
They have a lot of similarities with each other. Both in terms of how they look and how they ought to be identified or drawn.
But with a descending triangle, there are of course specific features to keep in mind if you want to identify when it should be drawn and when it is needed.
The first thing to keep in mind is that because a descending triangle is a continuation of a bearish trend pattern, then there needs to be a bearish trend already in the market.
Of course, when there are lows being recorded one after the other in the chart, the tops of those lows can be connected with each other to form the upper line of the triangle, which would naturally be descending.
On the other hand, the lower line of the triangle, which needs to be horizontal, is drawn based on the support line.
After these two lines are identified and drawn, it is time to be patient for their consolidation. When they eventually get together and consolidate, that is when you can expect the price breakout toward the down side.
How Can a Descending Triangle Be Used for Benefits in Forex?
If everything goes according to the formula and the ordinary calculations, what you would see after a descending triangle is the breaking of the support line, which also happens to be the horizontal line of the triangle toward lower prices.
This means following the price breakout from the descending triangle, shorting the pair would be in your best interest. But be careful about trend reversals.
But in order to make sure that you can maximize your profits you need to have a reasonable and proper profit goal. At the same time, if you want to minimize any possible losses, then an exit strategy should be calculated in the form of a suitable stop loss.
The way profit targets can be placed depends upon the entry price. So you take the entry price and you deduct the two last vertical heights from the figure. The resultant number should be your profit target. At the same time, the new resistance line should be regarded as the stop loss for the new positions.
Of course, you should also be careful about the confirmation of the breakout. Always check certain factors in order to make sure that the trend you have noticed is powerful enough for you to ride, whether a downtrend or an uptrend.
Now, in this case, with a descending triangle, you should be able to see lower highs as the trend moves forward, in addition to lower lows to confirm that the bearish trend is continuing forward and not reversing.
Difference Between Ascending and Descending Triangles
As was mentioned earlier, we have three major triangle patterns in technical analysis. Among them, the two kinds of descending and ascending triangles are really useful and they share their importance with each other.
But what is the difference between these two triangle patterns of technical analysis? The fact of the matter is that both of these patterns are regarded as continuation patterns, where you would normally expect to see the same trend continue moving forward after their price break out.
Of course the main difference between these two patterns is in the way they are formed. In shape and form they basically mirror each other and they have a rather perfect opposite. In a way that an ascending triangle has its horizontal line as the upper line which is basically formed by the resistance line.
On the other hand, the descending triangle has its horizontal line on the bottom of itself, which is formed from the support line.
The same difference can naturally be seen with the angled line of the triangle as well. Whereas with the ascending triangle we have an ascending line formed with increasing highs and lows, and with the descending triangle we have a descending line formed from decreasing highs and lows.
The descending triangle is one of the most well known and most useful patterns used in technical analysis. The main use of the descending triangle is the breakout of a continuing down trend into further bear territory. Though a bear market indicator, trend reversals are also a possibility with the descending triangle.