What is a Descending Triangle Pattern?

The Descending Triangle is considered to be one of the most powerful bearish patterns. The pattern is relatively common, and traders often encounter this in multiple stock markets. The pattern consists of a bottom horizontal support line along with a descending resistance line at the top.

The Descending Triangle pattern captures the battle which happens between the buyers and the sellers. Buyers try to hold their ground. However, the sellers can overpower them gradually. This eventually leads to a strong bearish movement. The pattern is viewed as a continuation pattern. A prior downtrend is essential for this pattern to work.

Visual Structure and Formation

Here is how the Descending Triangle pattern looks-

The descending triangle pattern has two parts: 

• Horizontal support: This is the support line which acts like the base of the triangle. 
• Descending resistance: The resistance line is downward sloping. This line connects the series of all the lower highs. This decline shows that the buyers are not able to reach the previous peaks, and hence, the strength is reducing for the buyers.

Over time, these two forces may squeeze the price into a narrowing range. This depends on the time frame; the triangle may last from a few weeks to several months.

In shorter time frames, it might compress quickly. The best way to think of this is spring being compressed. As the pattern continues to grow, the tension builds up. Eventually, the spring releases its energy. This is usually in the direction where there is less resistance. And in the case of Descending Triangle, this is the downward short entry.

Bearish Signals and Market Behaviour

The Descending Triangle pattern gives a sign of deep market psychology. Buyers are trying to take the market up from the support level. However, they are unable to push the prices up. Every rally attempt is weaker than the previous one. Sellers, on the other hand, are trying to lower prices. They are consistently able to do, as can be seen by declining swing highs. Every time the sellers hit the support zone, it weakens. 

Let's take an analogy. Imagine a person who is hitting the ground with a hammer. The first few hits are usually a waste of effort. There will be evidence of very little to no damage. However, if he keeps striking multiple times, these blows will eventually lead to a crack. Similarly, the more often the price tests the support, the higher the probability that it will break down decisively. This is the reason why the descending triangles are classified as a bearish continuation pattern. 

How to Trade the Descending Triangle Pattern: Entry and Exit Points

Here is how a descending triangle pattern can be traded: 

• Breakout Strategy
  Traders can enter a short position as soon as the price breaks below the support level. Conservative traders can wait for the price to close below the support to take the entry.
• Retest Entry
  This is a more protective approach where the traders can wait for the stock to retest. Retest means the stock makes a minor pullback to the resistance zone. Once this is done, the traders can go for a short entry. While this method will result in missing some quick moves, it reduces the risk of falling for a false breakdown.
• Stop Loss Placements
  Stop losses are very critical when you are trading a descending triangle. The most common placements are: 
• Slightly above the descending resistance line.
• Or just above the most recent swing.

If the market reverses unexpectedly, you are protected from significant losses.

• Target setting
  This measured move technique is widely used for selling profit targets. To find this, measure the height of the triangle, which is the vertical distance between the first height and the support line. And this distance can be projected downwards from the breakdown point.
  For example, if the triangle height is ₹50, and the breakdown happens at ₹200, the projected target becomes ₹150. The approach gives the traders a clear, logical price objective, helping them to lock in the profits rather than holding them blindly.

Real Examples from Markets

Here is an example of UPL on a daily timeframe. A descending triangle formation occurs, which breaks the support level. Traders can get a short entry there. The stop loss can be the previous swing high. Traders may put a 1:2 target on the downside, which can be easily attained in this case.

Difference in Comparison With Other Triangle Patterns

There are different kinds of triangle patterns. Here are the differences between them: 

• Ascending Triangle: They are seen when the market is already in a bull run but faces a temporary resistance. Rising support levels mark them, and the break of the resistance can offer further bullish bias.
• Descending Triangle: This pattern is seen when the market is already in a bear trend but faces temporary support. Declining resistance levels mark these, and the break of the support can offer further bearish bias.
• Symmetrical Triangle: This is very interesting, because here both the upper (resistance) and lower (support) lines are converging trendlines. This looks like a volatility contraction and a breakout either way is possible.

Here is the anatomy of the three types of triangles:

Risk and the Reward 

While this pattern more often than not produces good short entries, it cannot always be profitable. Risk management is extremely important when you are trading the pattern. Traders should put a stop loss and aim for a risk-to-reward ratio of at least 1:2. If the markets are choppy, traders can reduce the position size because the accuracy of the pattern reduces. 

Conclusion 

The descending triangle is one of the most useful bearish patterns. It can be used to convey that there is growing seller pressure, weakening buying strength and a high probability of breakdown. To be able to trade successfully, traders must:

• Wait for the confirmation through volume and closing prices.

• Manage the risk with a well-placed stop loss 
• Can look for critical zones to trade.

When used with the correct mindset and discipline, it could help the traders identify the high probability setups.