HOW TO IDENTIFY AND TRADE THE LOWER TRIANGLE: Bearish Reversal Signals

When prices start to oscillate within an increasingly narrow range, with decreasing highs and increasing lows, you are facing a very important pattern for anticipating market movements. This phenomenon is known as price consolidation, and the descending triangle is one of its most significant manifestations.

What Defines a Descending Triangle?

The formation of a descending triangle occurs when the price action is confined between two trendlines that gradually converge. Unlike other formations, this pattern is characterized by a continuously declining upper resistance line and a progressively rising lower support line. This “squeezing” movement of the chart reflects market hesitation and the temporary balance between buyers and sellers.

The symmetry of the two trendlines is crucial to validate the pattern. When both converge at approximately equal angles, you have greater confidence that a significant breakout is imminent. The descending triangle, specifically, forms in the context of a downtrend, setting the stage for an eventual bearish acceleration.

Fundamental Characteristics for Recognition

When analyzing charts, look for the following indicators:

Confined Price Movement: Volatility gradually decreases, with the price occupying an increasingly smaller space. This is the most obvious sign of consolidation.

Top and Bottom Structures: Successive highs become progressively lower, while successive lows become progressively higher. This structure should be consistent for at least two oscillations on each side.

Geometric Convergence: The imaginary lines connecting these tops and bottoms should meet at a defined point, forming the triangular geometry.

Declining Volume: Usually, during the consolidation period, trading volume decreases, indicating a lack of conviction in the market.

The Breakout Potential in the Descending Triangle

The most critical aspect of any triangle, including the descending one, is what happens when the consolidation ends. The accumulated tension within the pattern requires release, which occurs through a decisive breakout. In the case of the descending triangle, the most common is a downward breakout, confirming the continuation of the downtrend.

The price target for this movement can be calculated by measuring the maximum height of the triangle (the distance from the top to the bottom at its widest point) and projecting this distance from the point where the breakout occurs.

Confirmation and Risk Management

Do not enter trades solely based on the pattern’s appearance. Wait for confirmation through a clear closing candle above or below the relevant trendline. For trades in the descending triangle, this means waiting for a definitive close below the converging support.

Capital protection is essential. Place your stop loss on the opposite trendline or at a recent high swing, thereby reducing the risk of being caught by false breakout signals.

Practical Visualization Example

Imagine the following chart scenario: