In previous articles, we touched on triangle patterns and then looked into the ascending triangle pattern and how traders can utilize it to profit.

Today, we shift our focus to the descending triangle.

As mentioned earlier, triangles are what’s known as a continuation pattern (meaning they continue a previous trend). When a stock forms a descending triangle, it will usually continue trending lower (lower highs) after the brief consolidation is completed.

Understanding this bearish continuation pattern can provide valuable insights for traders looking for sell signals or shorting opportunities.

Let’s dive in and learn more.

What is the Descending Triangle Pattern?

The descending triangle pattern is characterized by two essential elements. At its bottom is a horizontal support line, representing a level at which buyers step in and prevent further price declines. The second component is the downward-sloping trendline, which connects a series of relatively equal highs. This trendline signifies the presence of selling pressure that prevents the price from rising.

As with other triangle patterns, the descending triangle is formed through consolidation. Sellers push the price down from the resistance line while buyers step in near the support level, creating a series of lower highs. This pattern indicates an ongoing bearish sentiment in the stock or overall market.

The example below shows the descending triangle forming with gold prices in the summer of 2020.

During the run-up on the chart, resistance turned into support (solid red). A downward-sloping trendline forms (green) as gold makes lower highs (consolidation). In this case, the prices violated the support and tested the next level (red dashes) before rebounding — only to break down once again.

Traders who noticed this pattern could have avoided a roughly 15% loss. Coincidentally, gold prices would make new all-time highs months later, only to form a new descending triangle and retest the red dashed support line again.

How Traders Use It

In our previous coverage, we stressed the importance of confirmation indicators. That applies here as well. To validate the descending triangle pattern and increase the likelihood of a successful trade, traders can consider the following confirmation indicators:

1. Volume: A breakout from the descending triangle pattern should ideally be accompanied by higher-than-average selling volume. Increased volume signifies stronger conviction among sellers, reinforcing the bearish bias.
2. Moving Averages: Confirm the pattern by checking if the consolidation occurs below a declining 50-day or 200-day moving average. This provides additional evidence that the downtrend is likely to continue.
3. Oscillators and Divergence: Utilize oscillators such as the Relative Strength Index (RSI) or Stochastics to identify bearish readings or negative divergence, which can support the potential breakout from the pattern.

Mitigating Risk: While the descending triangle pattern can offer valuable signals, it’s still important to mitigate risk. Consider the following measures:

1. Stop-Loss Orders: If you’re shorting, place a stop above the descending trendline to limit potential losses in case of a false breakout or a reversal in the price action.
2. Trade Size and Position Sizing: Determine an appropriate trade size based on your risk tolerance and overall portfolio allocation. Avoid overexposure to any single trade or position.
3. Market Analysis: Evaluate the broader market conditions and trends. Do they align with the bearish bias of the stock in question? If so, then this can serve as further reason to sell (or short).

Why The Descending Triangle Matters To Traders

The descending triangle pattern is a valuable tool for traders seeking bearish opportunities in the market. It can also serve as a signal to get out of a losing trade.

By understanding its formation, confirming the pattern with relevant indicators, and implementing effective risk management strategies, you can increase your chances of successfully avoiding losers — or even profiting from a short. However you choose to use it, remember that we rarely advocate using one technical tool in isolation. It’s best to combine the descending triangle with other technical indicators to make smart trades.

Editor’s Note: If you’re looking for ways to generate steady income, consider my colleague Robert Rapier.

Robert wants to give you exclusive access to all his lucrative income picks…forever.

Robert Rapier is offering a legacy membership to ALL THREE of his income investing advisories: Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator. His new three-in-one service is called the Platinum Income Alliance.

This deal is so lucrative, and stacked so heavily in your favor, Robert can only let 100 people through the doors. Take advantage of this rare opportunity by clicking here today.