What is a Descending triangle pattern?
A Descending Triangle pattern is used in technical analysis of stock price in stock market. It is a neutral pattern, means the pattern can indicate the reversal of the trend or continuation of the trend. The price action moves sideways towards the triangle peek, between resistance level and support level.
The Price action takes support on an equal horizontal level, while it takes resistance below the previous low. The pattern is neutral, so the breakout will occur either at resistance level or support level.
Understanding the Pattern
The price action takes support on an equal horizontal ground, every time of it returns. It means the Buyers are heavy at this point, preventing the price to go down.
On the other hand, the sellers are getting stronger as price action is taking resistance lower from the previous resistance point.
This Phenomenon results in breakout from either direction. Once the breakout happens, traders tend to aggressively buy or sell the share depending on which direction the price broke out.
How to identify Descending triangle pattern?
The famous quote “History repeat itself” is valuable concept to identifying the chart pattern in stock market. As we know the patterns today, it is come to known as Descending triangle pattern because it occurred millions of times before in the chart.
Patterns repeat itself, Previously, the patterns had occurred and during the formation the traders tends to act as an individual. They wait for the formation, they plot the trend line, and they wait for the breakout. Here are few things to remember while identifying the pattern.
- When the price action takes support on a similar level, plot a horizontal trendline.
- If the price action takes resistance lower from the previous support, plot a Descending trendline.
- The price action should move sideways between the trend lines.
- The Descending triangle pattern breakout will happen, wait for the breakout on either side.
How to do trading with Descending triangle pattern?
When to take entry?
Descending triangle pattern entry point will depend on which side the breakout will occur. Patience is the key to increase the probability of your trade to be successful. Many traders enter the market before the breakout, resulting in losing their investment.
It is unpredictable to decide whether the price will go up or down, making the investment risky before the breakout.
- When the price breakout at the resistance level, wait for the second candle to give confirmation. When the second candle closes above the breakout candle close. It will be your que to take buy position in the market.
- The closing of the second candle will be your entry point. You can enter into a buy position.
- Breakout at the Support Level, wait for the second candle to give signal, if the second candle closes below the Breakout candle. You can enter into a selling position.
- Closing of the second candle will be the entry point.
Where to add stoploss?
Stoploss is a tool to reduce the probability of risk factor. Stoploss provides security in long position as well as the short position. It works when the orders are executed with instructions to close a position when it reaches a certain price known as stop price.
Generally, it takes lot of experience to know where to place stoploss. Placing stoploss within minimum range often result in price action hitting the stoploss first. Stoploss does reduce your risk, but it is a risky situation to place a stoploss within limits. Many new traders often experience their trades hitting stoploss before the target. Here are two stoploss which can be placed for Descending triangle pattern.
Stoploss which is placed without any modification throughout the trade is called fixed stoploss. When price breaks out at the resistance level or support level. The Stoploss will be placed near the Opening of the breakout candle.
Stoploss which is placed and modified later during the trade to maximize profit is called trailing stoploss.
- When Price action breakout at the Resistance level. You can place trailing stoploss near the opening of the breakout candle and modify it later accordingly. For example, you enter into a buy position at 110 points and added your stoploss at 100 points. Let’s assume, you put the target at 140 but the price reaches 150, So increase your stoploss by 10 points. This way when the price reaches 200, your stoploss will be at 160. So, this will help you to maximize your profit and prevent you to lose your money as it were in stoploss 100.
- When price action breakout at the support level. The stoploss placement will be near the opening of the breakout candle, which can be modified later. For example, the entry is at price 500 and the stoploss is added near 520. Eventually, when the price reaches 470, you can decrease your stoploss till 510. This way if the price reaches around 400 there will be 50 points gap between the price and stoploss. This strategy will help you earn profit without the risk of losing all your profits earned during that trade.
Descending Triangle pattern Target placement.
Stock price x 2% or 3% will be the target point for a trade in Descending Triangle pattern. Let’s say, the stock price is $2000, then, 2000 x 2/100 = 40 points or 2000 x 3/100 = 60 points.
Trailing stoploss can be used to maximize the profit.