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Descending Triangle Trading Strategy Guide

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I love to trade the Descending Triangle chart pattern.

Why?

Because unlike most chart patterns which don’t make sense, the Descending Triangle has a logic to it.

And if traded correctly, it allows you to catch explosive breakout trades about to occur (way before anyone else).

I’ll share the details with you later.

But first…

What is a Descending Triangle and how does it work?

The Descending Triangle looks like a series of lower highs coming into an area of Support.

Here’s how it looks like…

This is a bearish chart pattern that shows the sellers are in control.

Here’s why…

Strong selling pressure and lack of buying pressure

Usually, as the price drops lower more demand comes in to push the price higher.

But that’s not the case for the Descending Triangle.

Because as the price drops lower, there’s still a lack of buying pressure. Instead, sellers are willing to sell at even lower prices (that’s why you get a series of lower highs).

Sell stop orders clustered below Support

Here’s the thing:

Many traders will buy because the price is at Support and set their stops below it (since that’s what most textbooks teach).

As more traders do it, the cluster of stop loss builds up over time.

And since the market moves from one area of liquidity to the next, the price is likely to break below Support and trigger those cluster of stops — which increases the selling pressure.

Pro Tip:

The Descending Triangle is one of the three triangle chart patterns out there.

The other two are the Ascending Triangle Pattern and Symmetrical Triangle Pattern.

Descending Triangle Breakout: How to “catch the train” before it leaves

The most common way to trade the Descending Triangle is to go short when the price breaks below Support.

Still, there are important things to consider if you want to find the highest probability breakout trades.

Let me explain…

1. The breakdown should occur near the apex of the Descending Triangle

In case you’re wondering… the “Apex” refers to the tip of the Triangle.

Now, the reason you want to short near the Apex is that’s where volatility is the lowest.

You’ll see the price gets squeezed till it “explodes” out of the Descending Triangle.

This works in your favor as the price can quickly move in your favor (with little to no drawdown).

Here’s an example…

Next…

2. The more times Support is tested — the better

When the price tests Support multiple times, it’ll attract more buyers and increase the number of stop orders below Support.

This is great for the breakout trader because if the price breaks below Support, this cluster of stop orders would increase the selling pressure towards the downside.

Moving on…

3. How to time your entry and set your stop loss

If you wait for a candle close, the price might have dropped a lot and you end up “chasing” the market.

Thus, my preferred method is to use a sell stop order and enter the trade when the price just breaks below Support.

And what about stop loss?

Well, I’d like to give it some buffer (like 1 ATR) and set it above the downward trend line.

Because that’s the point where if the price reaches it, it’ll invalidate the Descending Triangle chart pattern.

Here’s what I mean…

Now some of you might be thinking…

“But what if I miss the breakdown of the Descending Triangle?”

If that happens, the last thing you want to do is chase the market because that’s when the market is about to snap back higher.

Instead, a better option is to wait for the Re-test.

Here’s how…

1. Wait for the price to re-test the breakout point

If you wait for the re-test, you’re entering at a favorable trade location where previous Support is likely to act as Resistance.

This means you have a tighter stop loss on your trade which offers a favorable risk to reward.

2. Let the price “confirm” your bias

Now, you don’t want to “blindly” place a sell limit order at the breakout point because the price could breakout higher.

So, wait for the price to “confirm” your bias before shorting the markets.

This can appear in the form of reversal patterns like Shooting Star, Bearish Engulfing, etc.

3. How to time your entry and set your stop loss

Once the market has “confirmed” your bias, you can go short on the next candle open and have your stop loss 1 ATR above the swing high.

Here’s what I mean….

Moving on…

The First Pullback

There will be times when the market doesn’t re-test the breakout point.

So, what now?

This is where the final technique comes into play, The First Pullback.

This is where you trade the first pullback after the breakout (and it looks something like a Bear Flag pattern).

Here’s what to look for…

1. Wait for a first pullback after the breakdown

You want the pullback to be shallow with small range candles — and it shouldn’t go past the 20-period Moving Average (MA).

Why?

Because with a shallow pullback, your stop loss is tighter which offers you a favorable risk to reward.

Also, with a shallow pullback, it tells you the sellers are strongly in control and the next “wave” lower can be fast and furious.

2. How to time your entry and set your stop loss

After you get a shallow pullback, you can place a sell stop order below the swing low and go short when the price breaks below it.

And your stop loss can be 1 ATR above the swing high (or the 20MA).

Here’s an example…

Now:

You’ve learned 3 different techniques to trade the Descending Triangle.

In the next section, you’ll discover how to exit your winning trades for maximum profits.

Continue reading…

Descending Triangle: How to exit your winners for maximum profits

Now, there are two ways to exit your winning trades…

  1. Price projection
  2. Trailing stop loss

I’ll explain…

Price projection

This technique is adopted from Classical Technical Analysis where a chart pattern is completed after moving X amount in your favor.

For a Descending Triangle, X is defined as the distance between the highs and lows of the Descending Triangle chart pattern.

Here’s how it works:

  1. Calculate the distance between the high and low of the Descending Triangle
  2. Take the distance and project it at the breakout point
  3. The “future” price point is where you exit your trade

Here’s what I mean…

Pro Tip:

You can use the price projection technique and decide whether it’s “too late” to enter a trade, or not.

If the price is close to reaching its price projection, there’s probably not much meat left in the move (and you might want to skip the trade).

Trailing stop loss

Unlike the price projection technique, a trailing stop loss doesn’t use a fixed target profit.

Instead, you trail your stop loss as the price moves in your favor so you can ride a trend.

Here’s how it works…

  • Decide on the type of trend you want to capture (whether it’s short, medium, or long-term trend)
  • Trail your stop loss with the appropriate Moving Average (20MA for short-term, 50MA for medium-term, and 100MA for long-term)
  • Exit your trade when the price closes beyond the Moving Average

Here’s an example:

Pro Tip:

There are different ways to trail your stop loss. If you want to learn more, check out 5 Powerful Techniques to Trail Your Stop Loss and Ride Massive Trends.

Now you might be wondering:

“Which is better, price projection or trailing stop loss?”

One thing you’ll hear me repeating often is…

“There’s no best trading techniques, settings, or whatsoever.

You’ll need to know what’s your goal and then use the tools and techniques to meet your needs.”

So for example:

If you want to capture a swing (or one move) in the market, then the price project technique makes sense.

And if you want to ride trends in the market, then a trailing stop loss works best.

Make sense?

Great!

Conclusion

So here’s what you’ve learned:

  • The Descending Triangle shows that sellers are in control and the price is likely to move lower
  • You can trade the breakdown of the Descending Triangle by placing a sell stop order below Support
  • The more times the price test Support of the Descending Triangle, the greater the likelihood of a breakdown
  • If you miss the breakdown of the Descending Triangle, you can look to trade the re-test of the breakout point
  • Sometimes the price might not re-test the breakout point so that’s where you can trade the first pullback
  • You can exit your winners using the price projection or trailing stop loss technique

Now here’s what I’d like to know…

How do you trade the Descending Triangle?

Leave a comment below and share your thoughts with me.






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