Descending Triangle is a continuation Pattern in a bear run, just like Ascending Triangle it is a pretty common pattern and visible to everyone. It also can be found as a reversal pattern at the top but it works best and much stronger pattern as a continuation of a downward trend. Let's look at below how it works and forms the pattern.
Descending Triangle has a Downtrend Resistance which squeezes the price against the Horizontal Support to push it for a breakdown. Price must have at least two points touching Horizontal Support and the trend must be downwards with Lower High sequence. Just like any Pattern the price is getting squeezed closer and closer to the breakout point. Nothing is 100% so we need to make sure to avoid Fakeouts, how do we do that, we wait for confirmation. Since we are in bearish pattern we pay more attention to the fakeouts on the breakdown to the down side because thats where our interest of entry is.
What is confirmation, we will look for at least one more candle to close above the actual price level pretty simple, no? not really every breakout has pullbacks and pullbacks happen most of the time for shakeouts and get the price a bit cheaper into actual run. Lets look at the image below of a real chart how it would look.
On image above we see:
- Previous Downtrend - What we would like to see before Descending triangle starts to form.
- Horizontal Support - Should be hit at least twice and in this case we have two peeks, plus couple of more that was not hitting it directly.
- Downtrend support - Lower High sequence was perfect in this case (but not always is).
- Volume Decline - Volume should be declining as the triangle forms.
- Volume Spike - Volume rise preferred as it is another confirmation and shows interest in the breakout, but in this case the volume did not show us any confirmation to the breakout.
- Projectile Bar - Projectile bar is our target, in this case Descending Triangle has a projectile bar from $13 to $9 as the break out happens from the breakout point to our target will be $5 mark, in this case it was $6.5 mark as it pops, the sell off might keep going.
- Retest - Retest happened and it did peek out above the resistance line, the support was tested and turned into resistance in this case.
- Approximate time for Triangle formation - is from 1 week into 3 to 6 month, that all depends which timeframe you are looking into.
- What is our probability - Descending Triangle usually breakouts at 64% of triangle formation, our Downward chance will be 64% of the time and our Upward chance of breakout will be 36%.
- We buy at the breakout of our Horizontal line at the second candle using the first candle (horizontal support) as risk and our Target is the Projectile bar (you can also scale out little by little and pay yourself along the way).
