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How to Trade a Descending Triangle
Talking Points
-Triangle price patterns can be used in Forex trading to identify potential breakout setups
- Descending triangles form when a rising trend line and a horizontal support line converge
- Traders can look for the breakout from the descending triangle to signal the continuation of the AUDJPY down move.
Learn Forex: Descending Triangle
What is a Descending Triangle pattern?
A descending triangle pattern is consolidation price pattern composed of lower swing highs pushed lower by an established downtrend line converging with a horizontal support made up of a series of swing lows located in roughly the same area. Another name for the descending triangle is the right triangle pattern due to its similarity to the geometric shape of the same name. The height of the triangle meets the horizontal support at a 90 degree angle.
Usually, descending triangles form as profit taking by sellers is met with bargain hunting buyers. However, the buying pressure is mutted as higher lows are not made. A news release or economic announcement could be the catalyst required to push price out of this coil tilting the balance strongly in the seller's favor. Unlike its cousins, the symmetrical triangle and ascending triangle, the descending lacks significant bullish participation indicated by that lack of higher lows.
Learn Forex: AUDJPY Descending Triangle
(Created using FXCM’s Marketscope 2.0 charts)
Charting AUDJPY
Taking a look at the current AUDJPY 4-hour chart, you can clearly see price action bound between a descending trend line that connects the 11/6 swing high of 94.15 to 11/12 swing high of 93.05. This swing high is a lower swing high than the 11/10 93.19 swing high showing the building strength in the downtrend. Current price action within the triangle is below the 200 simple moving average (SMA), a key indicator that traders use to determine bullishness or bearishness.
Traders will watch price action for a 4-hour candle close below support to confirm that there is follow through in a potential breakout. Stops can be placed near the middle of the triangle just above the 93.00 and 200 SMA. The height of the triangle is a little over 170 pips. By extending this height from the support level of a potential breakout zone, look for a possible target of 91.14. The profit target coincides with the lows seen back on October 2nd.
In summary, descending triangles can be an excellent way to rejoin a downtrend that clearly illustrates risk and reward. Price has a tendency to break form the descending triangle in a downward direction.
---Written by Gregory McLeod Trading Instructor
To contact Gregory McLeod, email gmcleod@dailyfx.com.
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