A descending triangle is a kind of chart pattern in stocks that is formed when the topmost line is slanting downwards to the right. Finance technical analysis interprets this formation as bearish, meaning that the market is dropping. Price movements in this pattern still experience a rise and fall, but the peaks are generally in a declining pattern.
This chart pattern is also characterized by a vertical line on the left and a horizontal line at the bottom. Both lines form a right angle, which is why the right-angle triangle is another term for this chart pattern. The base line is created by reaction lows that hit similar marks, while the sloping line at the top can be traced using the reaction highs. The descending triangle is used to analyze a trend or a continuation of a pattern, so at least two reaction highs and reaction lows must exist to draw the triangle. The bearish pattern can span for a duration of several weeks, or can last as long as three months.
The descending triangle simply means that a market or an asset demand is dropping and might continue to do so in a period of time. Prices are also forced to drop drastically, attracting buyers to purchase and invest in the market, which will, in turn, bring profits to traders. The onslaught of buyers will then bring a higher demand for the market and turn the market from bearish to bullish. This instance is defined as a breakout, which means that the price has moved up significantly. Breakout can usually be indicated after the descending and horizontal lines in the descending triangle meet and a sudden spike soon follows.
In technical analysis, the direct contrast of a descending triangle is the ascending triangle, which illustrates a bullish market instead of a bearish one. In this state, the price and demand for a market are higher, an encouragement for traders and sellers to put their investments up for sale. Buyers would, however, be discouraged to buy if prices are high, which would result in a descending market demand. The stock charts usually express the demand cycle in alternating patterns of descending and ascending triangles. The stock market is indeed unstable, but can still be predicted if stock charts are observed regularly.