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Wednesday, November 21, 2007

DESCENDING TRIANGLE PATTERN – Part 1: Formation

Descending Triangle is a bearish pattern that normally forms in the midst of a downtrend as a continuation / consolidation pattern.
However, sometimes this pattern may also be found at the top of an uptrend, signaling a potential reversal of trend.

The Formation of Descending Triangle



Descending Triangle has a decreasing (downward sloping) upper line and a flat / horizontal lower line, forming a pattern that looks like a flat-bottom triangle.
In this case, the decreasing upper line acts as resistance, whereas the horizontal lower line as support.

This pattern occurs because the lows (troughs) are maintaining at about the same price levels, whereas the highs (peaks) are moving gradually lower.
As the range between the peaks and troughs are narrowing, the upper & lower lines converge at the "Apex", which is located at the right of the triangle.
The completion of the pattern occurs when prices break down through the horizontal lower line before finishing the apex of the triangle.

This pattern is usually considered as bearish pattern. The progressively lower highs that form the declining upper line indicate increased selling pressures, which give the Descending Triangle pattern a bearish bias.

The pattern implies that buyers and sellers are in a period where they are still hesitant about where the market is heading. However, sellers seem to be more aggressive than buyers, as the highs progressively get lower, while the lows are always holding about the same level. In the end, the sellers overpower the buyers and break down to the downside with great force.

Therefore, a triangle pattern may sometimes be associated with a “coil”. A “coil” needs to recoil (contract) in order to build up enough potential energy for its next expansion.

To be continued to Part 2: Important Characteristics of Descending Triangle pattern.

To read about other chart patterns, go to: Learning Charts Patterns

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

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