Descending Triangle

A descending triangle is a bearish chart pattern typically observed in a downtrend market, characterized by a series of lower highs and a declining resistance level. This pattern is created by two trendlines: one representing high prices and the other representing low prices.

The upper trendline forms a descending slope, while the lower trendline remains horizontal. The overall shape resembles a right triangle, with the hypotenuse sloping downward over time. The accompanying image illustrates ideal conditions for the formation of a descending triangle. However, it is uncommon to encounter a perfect triangle, as both the trendline and resistance line are often breached by false breakouts. Additionally, the support line may be slightly inclined.

As the price decreases, it consistently encounters resistance at a specific level while recovering some losses. The subsequent retracements tend to be shorter than previous ones, resulting in a series of lower highs. These lower highs suggest that more sellers are gradually entering the market, willing to accept lower prices to establish short positions. This dynamic creates selling pressure as the price consolidates toward the apex of the triangle.

The prices along the upper trendline continue to decline, narrowing the triangle formation until the support level indicated by the lower trendline is breached. Given the bearish bias of the price consolidation, traders should be vigilant for an impending breakout below the support level. Once the support level is broken, it transforms into a resistance level, reinforcing the overall downward trend of the asset's price over time.

Such breakouts can occur based on technical analysis or may be influenced by news events, making it essential to consider relevant fundamentals and market sentiment when utilizing this pattern.

To confirm a descending triangle on an asset's chart, traders should look for two reaction lows of similar magnitude and two reaction highs, each progressively declining in price. There should be a reasonable distance between each low or high.

Generally, a descending triangle is viewed as a bearish continuation pattern. However, it can occasionally appear in uptrends, suggesting a potential major trend reversal. Regarding breakouts, this pattern can be somewhat ambiguous, as the escape from the descending triangle can occur in either direction. Statistically, downward breakouts are more likely, but upward breakouts tend to be more reliable.

Among upward breakouts, those that occur after a gap are particularly desirable, as larger gaps reduce the likelihood of the price retreating back into the triangle, thereby maintaining the structure as much as possible.