Definition
A Descending Triangle is a bearish chart pattern used in technical analysis that is formed by drawing one trend line that connects a series of lower highs and a second horizontally flat trend line that connects a series of lows. Generally, the pattern is recognized as a continuation pattern, indicating a downward trend after a break below the lower support. This pattern suggest the potential for a break downwards.
Key Takeaways
- The Descending Triangle is a bearish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second horizontal trend line that connects a series of lows.
- Usually, a valid descending triangle pattern takes at least a few weeks to form and it’s recognized as a continuation pattern, indicating the continuation of a downtrend. Traders typically enter a short position when the price breaks below the lower support line.
- The projected price move for a breakout of a descending triangle can be estimated by measuring the height of the back of the triangle and extending this distance downwards from the point of the breakout.
Importance
The finance term ‘Descending Triangle’ is important as it is a bearish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second horizontal trend line that connects a series of lows.
This pattern indicates that sellers are more aggressive than buyers as they are willing to sell the asset at a lower price each time.
This leads to lower highs.
If the support level, represented by the lower flat line, is broken, it typically results in a strong price movement downwards.
Therefore, identifying a ‘Descending Triangle’ can help investors predict potential downtrends and make investment decisions accordingly.
Explanation
The Descending Triangle is a key tool utilized by traders for technical analysis in finance. It is primarily used to identify and potentially profit from continuation patterns within trend lines, or to recognize potent reversals.
Traditionally seen in a downtrend, it holds the purpose of highlighting areas where the market price may break down, offering a possible strategic entry point for a sell position. It indeed plays an essential role in discerning the market sentiment towards a particular security, highlighting stronger selling pressure.
The Descending Triangle can be construed as a bearish chart pattern that indicates a potential decline in the asset’s price, which can be an incredibly valuable piece of intel for traders looking to capitalize on downward trends. It serves as a visual representation of the supply and demand dynamics emerging within a particular period.
In essence, this pattern is formed when there’s a horizontal line marking support levels and a downward-sloping line marking lower highs. Once traders spot the Descending Triangle pattern, they can take advantage of the bearish decline that usually follows, making this a beneficial tool in predictive analysis and strategic planning within the realm of financial trading.
Examples of Descending Triangle
Sure, I can provide you with three real-world examples about the finance term, “Descending Triangle”:
The Bitcoin Crash in 2018: Between January 2018 and December 2018, Bitcoin exhibited a descending triangle pattern. The price of Bitcoin formed a series of lower highs and bounced off the same support region multiple times, forming a descending triangle pattern. In November 2018, it experienced a significant breakout that marked the beginning of a rout that saw it lose over 50 percent of its value.
The 2010 BP Oil Spill: In 2010, after the Deepwater Horizon oil spill, BP stocks showed a descending triangle. After the oil spill in April, the stock price fell significantly and began to fluctuate at a certain level, showing a horizontal line of support. Meanwhile, each periodic high tended to be lower than the previous one, forming the descending triangle. The descending triangle formation was completed when the stock price broke through the support line, and the price fell sharply afterwards.
Ford and the Financial Crisis in 2008: In the face of the global financial crisis, Ford Motor Company’s stock price began to experience a descending triangle pattern in
The trend was present with a horizontal line of support and a downward trend line. By early 2009, Ford’s stock dropped significantly, following a break from the descending triangle pattern.
FAQs on Descending Triangle
What is a Descending Triangle?
A descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trend line that connects a series of lower highs and a second horizontal trend line that connects a series of lows. Typically, the pattern is confirmed when the price falls below, on high volume, the horizontal line.
How does the Descending Triangle pattern work?
The descending triangle pattern is recognized primarily in downtrends and is thought to signal the continuation of the current trend. However, this pattern can also form during an uptrend as a signal of the trend’s change
What is the significance of a Descending Triangle?
The descending triangle is significant because it typically presents a bearish scenario and therefore a potential sell signal. Traders who recognize this pattern might want to consider selling a security if the price breaks below the triangle on a high volume.
Is the Descending Triangle always an accurate indicator?
While the descending triangle is a commonly used pattern in technical analysis, its accuracy varies. It’s important to always use additional forms of analysis to confirm the potential breakouts or breakdowns.
Related Entrepreneurship Terms
- Support Level
- Resistance Level
- Trend Lines
- Technical Analysis
- Bearish Pattern
Sources for More Information
- Investopedia: An extensive financial educational website that provides valuable insight into the Descending Triangle alongside financial-term definitions, tutorials, and case studies.
- The Balance: A personal finance website that can offer hand-on tips about Descending Triangle, and has articles delivered by industry experts.
- Baby Pips: A beginner-friendly website offering a Forex trading community, perfect for understanding the descending triangle in the context of currency trading.
- NASDAQ: The official website of the stock exchange NASDAQ. With a library of financial tools and news, the site provides in-depth information and analysis on the Descending Triangle and other chart patterns.
