The descending triangle is a well-known pattern in the forex trading world that is often used to indicate a potential continuation of an existing trend. This pattern is characterized by a combination of a flat lower trendline and a downward-sloping upper trendline. As the name suggests, the descending triangle indicates a potential downward price move, making it a popular choice among traders seeking to profit from a bearish market.
In this article, we’ll cover the basics of the descending triangle, including its definition, how to identify it on forex charts, and how to trade it. Additionally, we’ll discuss the advantages and limitations of using this pattern to make trading decisions.
What Is A Descending Triangle?
The descending triangle is a common pattern in technical analysis and is characterized by a flat lower trendline and a downward-sloping upper trendline. This pattern shows that sellers are outpacing buyers, as the price makes lower highs. The triangle is considered complete when the price breaks out in the direction of the larger trend. In this article, we will explore the key elements of the descending triangle and how traders can identify and trade this pattern in the Forex market.
How to Spot a Descending Triangle on Forex Charts
Identifying a descending triangle pattern in the forex market is straightforward if you know what to look for. Here’s a simple method that can be applied to all financial markets:
- Downtrend: The market must be in a downtrend before the descending triangle can form. This highlights the importance of not simply trading the pattern as soon as it appears.
- Consolidation: The descending triangle appears during a period of consolidation.
- Upper trendline: While the market is consolidating, a downward-sloping trendline can be drawn connecting the highs. This line shows that sellers are gradually pulling the price down, supporting a bearish trading bias.
- Lower trendline: The lower trendline acts as support, with price frequently approaching and bouncing off the level until the eventual breakout.
- Trend Continuation: After price breaks strongly below the lower trendline, traders will look for confirmation of the pattern through continued downward momentum.
The Descending Triangle Measuring Technique
The descending triangle, also known as the “falling triangle,” has a specific measuring technique traders can use to estimate potential take profit targets. To apply the technique, traders measure the distance from the highest point of the descending triangle (point A) to the flat support line (point B), and then transfer that same distance from the breakout point (point C) to a potential take profit level (point D). This helps to project the target for the trade.
Trading The Descending Triangle Pattern
To trade the descending triangle, traders should follow these steps:
Identify the downtrend: The first step is to ensure that the market is in a downtrend before the descending triangle pattern appears.
Spot the pattern: The descending triangle will form when price starts consolidating and a downward sloping trendline can be drawn by connecting the highs. A flat support line will also be visible.
Apply the measuring technique: The distance from the start of the pattern to the flat support line can be used to project a possible take profit level.
Enter a short position: After a strong break below support, traders can enter a short position, with a stop at the recent swing high and a take profit target based on the measuring technique.
Advantages And Limitations Of The Descending Triangle
Advantages of the Descending Triangle:
- Easy to identify
- Provides a clear target level based on the maximum height of the triangle
- Intermediate-term pattern, allowing for potential trades within the triangle
Limitations of the Descending Triangle:
- Possibility of false breakouts
- Risk of price moving sideways or even higher for an extended period of time.