Tips for Trading Descending Triangles Long

Descending triangles have been very popular with traders on the short side, but not so often traded when it breaks in the upward direction. A descending triangle is defined by two lines, one on the lower boundary of the price movement which is horizontal and one on the upper side which slopes down.

Descending Triangles, Unexpected Returns

Most descending triangles would be expected to break down but, in fact 43%, break out to the upside making this pattern tradable on the long side. Only 41% of these breakouts are profitable and on average the profit per trade is 0.87% over a period of 8 days. The descending triangle is not the best chart pattern when it breaks to the upside, but applying some filters makes this pattern attractive to trade.

Specific Setups to Improve Profitability

A long breakout from a descending triangle works better in a rising market and sector environment. Ensure both the market and sector, are in a consolidation phase or an up trend prior to the breakout. The stock will usually be falling as it forms the pattern. Essentially you are trading the descending triangle when it forms during a pull back in a bullish environment.

Avoid trading descending triangle patterns that breakout early, in the first 30% of the pattern. Likewise avoid very shallow patterns where the height of the pattern is less than 2% of the stock price.

Illiquid stock can sometimes be identified by two identical closes or highs and if this is the case you are better to avoid these trades. If volume supports a descending triangle breakout then the profitability of the trades improves. For volume to support the breakout, volume when the stock is going up should be greater than volume when the stock is going down.

Descending Triangles Can Be Profitable

You can improve your trading results by using a series of simple filters that have been outlined here. This select group of descending triangles delivers an average profit of 1.45% in 10 days and is profitable on 51% of the trades. Overall this makes descending triangles attractive to trade.

Note: Statistics for this article have been provided by Patterns Trader after analyzing over 60,000 chart patterns on the Australian market from 2000 – 2008.