HOW TO TRADE DESCENDING TRIANGLECHART PATTERN

in-depth tutorial

DESCENDING TRIANGLE EXPLAINED

DESCENDING TRIANGLE ILLUSTRATION

Bearish "Descending Triangle" chart pattern illustration
Direction: Continuation
Type: Bearish
Occurrence: Medium
Common term: Medium - Long

DESCENDING TRIANGLE PRICE ACTION STRUCTURE

  • In a downtrend, price action finds first resistance 1, which will the horizontal resistance for the rest of the pattern formation, where it reverses direction goes upwards till finding first support 2, which will be the highest high in the pattern.
  • Price action reverse direction from support 2 and goes downwards, till finding the second resistance 3, which will be -around- the same rate of the first resistance 1.
  • Price action reverse direction from resistance 3 and goes upwards, till finding the second support 4, which must be lower than the first support 2.
  • The pattern is completed when price action reverse direction from 4 and goes downwards till it breaks the triangle's lower horizontal border at point 5.

NOTES ON DESCENDING TRIANGLE

  • Before the breakout, 4 touches to the triangle's borders are the minimum for a valid pattern, more touches are acceptable.
  • The breakout of the pattern is expected at around (half / two third) the triangle formation, measured from first touch 1 to the intersection point of upper and lower borders.
  • The more common direction for the pattern is continuation, but that doesn't rule out the existence of reversal descending triangles.
  • Volume usually decreases as the pattern is being formed, and increases when breaking or retesting the triangle's lower border 5.
  • This pattern is commonly found on medium and long-term time-frames.

HOW TO TRADE DESCENDING TRIANGLE

  • Trade entry: after breaking the triangle's lower border at point 5, either with an entry after confirming the breakout, or after a -possible- retest to the lower border's rate.
  • Take profit: identified by measuring the vertical distance from the first touch 1 to the second touch 2, that measurement is then applied from the breakout point 5.
  • Stop loss: can either be the triangle's lower border that turned into support 5, or the last touch to the triangle's upper border before the breakout 4.

DESCENDING TRIANGLE REWARD:RISK

  • When using the last touch before the breakout as stop loss, the pattern's R:R improves when that touch is near the end of the triangle, as well as when the upper border's down-slope is steeper.
  • When using the lower border's rate as stop loss, R:R will depend on the (entry rate - break rate) distance, compared to the target measurement (1 - 2) distance.
  • Always remember that both stop loss levels explained above are absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to those rates.

DESCENDING TRIANGLE REAL EXAMPLE

Real example for a bearish "Descending Triangle" chart pattern, using the H4 chart of USD/CAD on Oanda's MT4 platform
Currency pair: USD/CAD
Timeframe: H4
Breakout: 25-Feb-2016
Platform: MT4
Broker: Oanda

DESCENDING TRIANGLE FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the lower border at point 5
  • Take profit: 285.8 pips - usual measurement applied from point 5
  • Stop loss 1: 129.6 pips (R:R 2.205) - set at 14% of target measurement, beyond absolute SL1
  • Stop loss 2: 308.9 pips (R:R 0.925) - set at 7% of target measurement, beyond absolute SL2

NOTES ON THIS TRADE SETUP

  • If your trading style for descending triangles involves using SL2 method, you will notice that R:R for that specific setup is below 1 due to the relatively long candles when breaking the pattern at 5. In such case, that trading setup should have been passed, unless your sampled data for this pattern have a strong W/L to compensate for the low R:R