Traders use the descending triangle chart pattern to help capture shorting opportunities.
While generally categorised as a bearish pattern, the descending triangle is typically a continuation formation, as a consolidation phase within a downward price trend. It can also be observed as a reversal pattern following a pronounced upward price trend.
Traders tend to use a downside breakout from a descending triangle pattern as good reason to hit the sell button.
A descending triangle is formed by two trend lines; one line is drawn horizontally intersecting previous price troughs that represent a support level, while the upper line of the triangle is a downward sloping line that is drawn through consecutive price peaks.
Traders tend to see a shorting opportunity when the price breaks out below the lower horizontal line as the price will often fall sharply once a meaningful move below this level takes place.
In general, a greater number of points along the lower trend line tends to make for the strongest descending triangle signal. It shows that this price level really has been a formidable point of support, so a breakout below it is likely to be all the more significant.
As a minimum requirement, the descending triangle formation requires at least two low points across the horizontal line and two points along a downwardly sloping upper line.
Trading volumes tend to diminish while the descending triangle pattern is maintained, defining it as a typical consolidation phase. It’s therefore crucial that a price breakout below the horizontal trend line is accompanied by higher trading volumes to ensure that it is a valid shorting signal.
A breakout below the support level could be an indication that big institutional investors are selling the asset, precluding an even sharper price fall.