In this week’s blogpost, I will be writing about another simple pattern which is the opposite of the ascending triangle pattern and can give good returns if spotted correctly.
This pattern could be a difficult pattern to trade in an up trending stock, compared to the previous patterns I’ve covered. This is because the descending triangle pattern after breakout can morph into a rectangle pattern and the stock can continue to go sideways.
However, if spotted in a down trending stock, it can work out very well.
How to spot a Descending Triangle pattern?
The rules as usual are very simple – the pattern needs to have a horizontal bottom line and a downward sloping trendline that forms the descending triangle pattern.
In the below example of National Aluminum (monthly chart), you can notice the 13 year descending triangle pattern with 3 touch points in the downward sloping trendline and 3 touch points in the horizontal bottom line. Remember, any trendline with 3 or more touch points is a valid and significant trendline.
The horizontal bottom line acts as a zone of price support from where the price reversed up multiple times. The downward sloping trendline acts a zone of price resistance from where the price reversed down 3 times.
Once the price crosses above the downward sloping trendline, which is a breakout, the price tends to move higher sharply which is usually supported by good volumes as highlighted above in the chart.
How should you trade the descending triangle pattern?
In order to trade this pattern, you should
- Identify the horizontal bottom line from where the price reversed up at least twice. This level need not be perfect.
- Identify the downward sloping trendline which has at least two touch points from where the price reversed down. Three touch points would be excellent and should be traded with much higher conviction.
- Buy the stock once it crosses the downward sloping trendline. You can place a buy-stop order and when the price crosses the downwards sloping trendline the order would be triggered.
- Keep a stop loss below the previous swing low.
Remember, the longer the duration of this pattern, the stronger the price move up.
Let’s take a few more examples of this pattern
Example 1: Nifty
Below is an example of Nifty on the hourly chart. The price was moving in a descending triangle pattern for around 2 weeks before a strong breakout occurred which ensured Nifty rallied quickly.
Example 2: Laxmi Organics
Below is another example of Laxmi Organics on the daily chart. The price was moving in a descending triangle pattern for more than 1.5 months, before the breakout occurred resulting in a sharp move up.
I hope this explanation has been useful and you will be able to find and trade the descending triangle pattern successfully.
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