The Descending Triangle pattern is formed when the price of a security establishes a support level (1, 3, 5) and bounces off that level to a declining resistance level, creating a down-sloping top line (2, 4). The breakout can either be up or down, depending if the resistance or highest support level is broken first.
This pattern is commonly associated with directionless markets since the contraction (narrowing) of the market range signals that neither bulls nor bears are in control.
Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the breakout price level. To identify an exit, compute the target price by adding the pattern height from breakout point. For upward breakouts the level is the highest high within the triangle (2). Pattern height is the difference between the level of the bottom horizontal line and the highest high.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to sell at or below the breakout price.
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