How to Trade the Descending Triangle Pattern in Forex

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Contributor, Benzinga
July 3, 2023

If you're frustrated by the lack of significant movements and results in your forex trading, it's time to discover the power of the descending triangle pattern. This tool allows you to identify breakout possibilities with relatively lower risk and the potential for high rewards. 

This article will walk you through the process of identifying and effectively trading this pattern, enabling you to enhance your trading outcomes and achieve the desired results. Prepare to elevate your trading strategy and unlock the potential of the descending triangle pattern. 

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What is the Descending Triangle Pattern?

The descending triangle pattern is a technical analysis chart pattern characterized by a flat support level and a descending upper trendline connecting lower highs. The pattern indicates a potential trend continuation or reversal and is completed when the price breaks below the lower trendline with high volume. The descending triangle pattern suggests a likely bearish trend, indicating that sellers may be gaining control of the market. By recognizing this pattern, traders can position themselves to profit from a possible breakdown in price.

What Does the Descending Triangle Pattern Indicate?

The descending triangle pattern in the forex market shows that the sellers are more forceful than the buyers as the price drops in value. This pattern indicates a potential weakening in demand for a currency pair and could signal a continuation or reversal of a downtrend. When the price approaches the support level within the descending triangle, it means that buyers are becoming less willing to push the price higher. At the same time, sellers may be putting on more pressure, causing the price to make lower highs. This tug of war typically indicates a consolidation phase before a potential downward breakout.

Traders can take advantage of this pattern by entering short positions when the price breaks below the lower trendline with high volume. By subtracting the height of the triangle from the breakout point, traders can calculate a price target for the pattern. 

How to Identify a Descending Triangle Pattern on Forex Charts

To spot a descending triangle pattern in forex charts, you must observe three key components: a support level, a resistance level and a descending trendline. 

  • Support level: There should be a horizontal support level that acts as a floor for the price. The price bounces off multiple times but cannot break below. 
  • Resistance level: A downward-sloping resistance level connects the lower highs of the price, which the price touches several times but fails to break above it. 
  • Descending trendline: A descending trendline should be drawn by connecting the support and resistance levels. This trendline forms the triangle's hypotenuse (the longest side) and narrows as the price moves within it. 

The descending triangle pattern is confirmed once the price breaks below the support level with high trading volume, signaling a bearish breakout. These components form a distinct triangular shape, as shown in the accompanying image.

How to Trade the Descending Triangle

If you want to trade using the descending triangle pattern, follow these steps:

  • Wait for a high volume breakout below the support level. This confirms that the sellers have taken over, and the price is likely to keep falling.
  • Take into account various factors that may affect the strength and validity of the breakout, such as the overall trend, duration of the pattern, number of trendline touches and market conditions.
  • To protect yourself from false breakouts or reversals, place a stop-loss order above the resistance level or the last lower high. You can also use a trailing stop to lock in gains as the price moves in your favor.
  • Choose a profit target based on the triangle's height or a Fibonacci extension level. You can also use technical indicators or price action signals to exit the trade when momentum fades or reverses.

Tips for Trading the Descending Triangle Pattern

If you plan on trading the descending triangle pattern, here are some helpful tips:

  • Keep an eye on the price action after you enter the trade. Look for confirmation or rejection of the breakout by paying attention to things like candlestick patterns, volume bars or moving averages.
  • Adjust your stop-loss order to minimize risk and secure profits. You can use either a trailing stop or a fixed percentage of the price movement.
  • Avoid being greedy or fearful and exit the trade when necessary. You can use technical indicators or price action signals to identify when momentum is fading or reversing. Look out for divergence, oversold/overbought conditions, support/resistance levels or reversal patterns.

Seize Opportunities with the Descending Triangle Pattern

As a forex trader, you can use the descending triangle pattern to identify bearish trends and capitalize on potential opportunities. To spot this pattern, search for a triangle shape that consists of support, resistance and a descending trendline. Confirm the pattern's strength by analyzing volume and market trends. Once the support level is broken, enter a trade and establish stop-loss orders and profit targets. Keep an eye on market news and monitor price action to support your trading strategy. For improved accuracy, consider combining this strategy with other indicators. 

Frequently Asked Questions 

Q

Can a descending triangle pattern be bullish?

A

No, the descending triangle pattern is typically considered bearish and often indicates a potential downward price breakout.

Q

How accurate is a descending triangle pattern?

A

The accuracy of the descending triangle pattern varies depending on various factors, including the strength of the pattern and overall market conditions. Try to combine the pattern analysis with other technical indicators and analysis for better accuracy.

Q

How do you target and stop-loss a descending triangle pattern?

A

When targeting and setting a stop-loss for a descending triangle pattern, traders often measure the height of the pattern and project it downward from the breakout point to estimate a potential target. The stop-loss order can be placed above the breakout point or the recent swing high, depending on the trader’s risk tolerance and market conditions.

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About Jay and Julie Hawk

Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. With over 40 years of collective trading expertise and more than 15 years of collaborative writing experience, the Hawks specialize in crafting insightful financial content on trading strategies, market analysis and online trading for a broad audience. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.