In Continuation with Last week article of Trading Stocks with Symmetrical Triangle’s Chart Pattern and How to trade Ascending Triangle Chart Pattern lets discuss another triangle pattern
- Descending Triangle Pattern
Descending Triangle: This pattern comprises of 2 trendline, one drawn horizontally to mark the support, second trendline is downward sloping trendline formed by joining the lower highs. This pattern is classifies as . Volumes generally diminish during the formation of the pattern and when breakdown/breakout occurs volume expansion occurs for pattern confirmation.
Descending Triangle chart pattern should contain at least 2 or more similar low not exactly equal but in proximity to form the lower horizontal trendline. To form the downward slopping trendline at least two lower highs are required. We would set an entry order below the support line and buy order above the slope of the lower high..
Let’s elaborate the Descending Triangle formation with an Example of Google Inc daily Chart.
As seen in the below chart Google has formed support at 553 for 2 times from Nov-10 to Mar-11. Price has gradually started making lower highs which signify sellers are gaining control over Stock.
On 15th April 2011 Google announced its first quarter results which were below the market expectation and Stock tanked almost 8%. Stock broke its support of 553 with a huge gap down.
Descending Triangle Breakdown is seen in the below chart after it broke 553 supported by expansion of volumes.
High of Range: 631
Low of Range: 553
Difference: 78 (631-553)
Target: Breakout Point – Difference of Range ie. 545-78 =467.
Google made low of 473 on 24th June 2011 almost reaching the target.
Few More Examples
Triangles like other chart patterns are subject to many false moves Most traders allow for a 1 to 3% move outside of the pattern with expansion in volume before the breakout is considered as valid . When a breakout occurs, the trend that results is expected to be in the direction of the breakout.
The Chart below is of Nifty futures 30 minutes chart with a descending triangle. Pattern also shows two false breakdowns as NF went below 5997 but quickly recovered leading to triggering of Stop loss for traders.
The triangle chart pattern is one of the most reliable patterns, when traded with proper stop loss. Triangle breakout should be confirmed using Volumes and Indicators like MACD,Stoch to avoid whipsaws. Trader should always using trailing Stop loss to protect the profits.
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Thanks for the post Bramesh, great stuff as usual. Question on the stop loss while trading these triangle breakouts, where is a good stop for this?
Also, is it better to trade a retrace back to the trendline to enter the trade to prevent getting caught in a false breakout?
I will try to write an article on the question you have asked, as its difficult to answer them without using charts.