This contrasts with descending triangle formations that occur when price lows are consistent, with price highs increasingly lower. A descending triangle pattern, like its ascending peer, is meant to provide insight into the potential future movements of a security, not an exact prediction of the next price. The descending triangle is one of three triangle patterns used in technical analysis. After recording a lower high just below $60 in December 1999, Nucor formed a descending triangle early in 2000. In late April 2000, the stock broke support with a gap down, sharp break, and increase in volume to complete the formation.
The market broke out and then revisited the breakout level, before it finally turned down in the anticipated direction. The next step is to wait for the breakout below the lower line of the triangle, which confirms that the market is headed downwards. Normally we demand that there must be a minimum of two highs and two lows, which is what it takes to draw the two lines that mark the start of the pattern. Of course, the more points the lines connect the more certain you can be that the pattern indeed is forming. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.
Common Trading Strategies with Descending Triangles
A breakout occurs when the price of an asset moves above a resistance area, or below a support area. An ideal validation of the pattern occurs when there’s a downside break with an expansion of volume for confirmation. While an increase in volume at the breakout is preferred as it indicates stronger market conviction, it is not always necessary. Unlike the ascending triangle, this time the bottom part of the triangle appears flat. The higher price however attracts more sellers and prices re-test the old lows.
- Just like feeling squeezed into that mountain valley, the descending triangle on a stock chart shows a downtrend being compressed between two converging lines.
- To find your price target, take the thickest portion of the triangle and subtract it from the breakout point.
- In this case, you will find that price action stalls at the end of a downtrend.
- Then you project the same from the breakout area which becomes your target price.
- The pattern should be clearly defined, with a trendline connecting the lower highs and a horizontal support line.
- A descending triangle pattern stock market example is illustrated on the daily stock chart of Groupon (GRPN) stock above.
Converging Lines
A descending triangle is a bearish price pattern that occurs in a downtrend, signaling a potential continuation of the bearish trend. It consists of at least two lows at the same level, forming a horizontal line, and two lower highs, creating a downward-sloping trend line. The descending triangle is recognized primarily in downtrends and is often thought of as a bearish signal. As you can see in the above image, the descending triangle pattern is the upside-down image of the ascending triangle pattern. The two lows on the above chart form the lower flat line of the triangle and, again, have to be only close in price action rather than exactly the same.
Step 3: Stop Loss and profit target placement
However, this is seen as a less reliable signal and is not commonly used as an entry signal. Technical tools are used to make predictions about future trends based on past performance. But remember that the market can be very unpredictable and can swing in any direction at any time. Again, like with bearish breakouts, the height of the thickest part of the triangle can be used to set a price target. Most of the time, a downward triangle formation is considered bearish, but not always. A breakout is when a stock’s price moves out of the established triangle pattern.
The minimum descending triangle chart pattern distance that price moves prior to the breakout is measured from the initial high. This distance is projected lower after price breaks out below the support level. Like with any strategy, you can use the descending triangle pattern to buy/sell stocks by knowing when to enter, take profits, and cut your losses. As we mentioned above, the simplest way to use this pattern is to buy the breakout of the triangle.
Yes, although rare, a descending triangle may appear as a reversal pattern at the end of a bullish trend. However, it generally remains a bearish pattern regardless of the prior trend. The symmetrical triangle is a triangle that is made up of lower highs and higher lows, which leads to that both lines are sloping and converging. The meaning of the pattern is then decided by the direction of the following breakout.