Descending triangle formation is a classic reversal pattern. It signifies the weakness of buyers in a bullish trend and bearish accumulation.
In this article, I will teach you how to trade descending triangle pattern. I will explain how to identify the pattern properly and share my trading strategy.
⭐️ The pattern has a very peculiar price action structure:
Trading in a bullish trend, the price sets a higher high and retraces setting a higher low.
Then the market starts growing again but does not manage to set a new high, setting a lower high instead.
Then the price drops again perfectly respecting the level of the last higher low, setting an equal low.
After that, one more bullish movement and one more consequent lower high, bearish move, and equal low.
Based on the last three highs, a trend line can be drawn.
Based on the equal lows, a horizontal neckline is spotted.
❗What is peculiar about such price action is the fact that a set of lower highs signifies a weakening bullish momentum: fewer and fewer buyers are willing to buy from horizontal support based on equal lows.
🔔 Such price action is called a bearish accumulation.
Once the pattern is formed it is still not a trend reversal signal though. Remember that the price may set many lower highs and equal lows within the pattern.
The trigger that is applied to confirm a trend reversal is a bearish breakout of the neckline of the pattern.
📉Then a short position can be opened.
For conservative trading, a retest entry is suggested.
Safest stop is lying at least above the level of the last lower high.
However, in case the levels of the lower highs are almost equal it is highly recommendable to set a stop loss above them all.
🎯For targets look for the closest strong structure support.
Below, you can see the example of a descending triangle trade that I took on NZDCAD pair.
After I spotted the formation of the pattern, I was patiently waiting for a breakout of its neckline.
After a breakout, I set a sell limit order on a retest.
Stop loss above the last lower high.
TP - the closest key support.
90 pips of pure profit made.
Learn to identify and trade descending triangle. It is one of the most accurate price action patterns every trader should know.
