Trading With Descending Triangle Pattern: Identifying Downtrend Breakout Potential

The descending triangle chart pattern, the opposite of the ascending triangle pattern, is often used to identify setups with breakout potential. This pattern forms when the trend line and horizontal support line intersect. This article exemplifies the occurrence of a breakout from the descending triangle pattern as a signal of a downtrend continuation.

The descending triangle pattern indicates a consolidation phase comprising swing high points pushed downward by the downtrend line and meeting the horizontal support line consisting of swing low points. Previously, the price has been moving in a downtrend direction. Traders with buy positions maintain their positions, while sellers aim to push the price lower, forming lower high levels.

As the price approaches the sellers' price level, the price movement typically breaks through the support level guarded by buyers, continuing the previous downtrend direction. Consequently, the number of traders with sell positions continues to increase due to the bearish market sentiment.

Typically, the descending triangle pattern forms due to profit-taking actions by sellers meeting with new buyers entering the market. Nevertheless, the selling pressure tends to persist on the horizontal line formed, with no formation of higher low points.

Important news releases or fundamental data can also act as catalysts for a breakout in the downtrend direction.

For instance, the image above illustrates the formation of a descending triangle pattern on the AUD/JPY pair in the 4-hour timeframe on November 12, 2013. The price movement is linked between the swing high on November 6 at 94.15 and the swing high on November 12 at 93.05, lower than the previous swing high at 93.19 on November 10. This indicates the strength of the downtrend. Additionally, the price movement is below the simple moving average (SMA)-200 line, further confirming the bearish strength.

A sell entry can be executed when the price closes below the support level, indicating a breakout. The stop loss can be placed in the middle of the triangle, around the level above 93.00 and SMA-200. The target profit can be set at the previous low level on October 2.

The probability of a breakout from the descending triangle pattern is significant, allowing for an adequate risk/reward ratio to be applied in trading.

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