The descending triangle is the most profitable chart pattern when trading short. The descending triangle is formed with the lower boundary of the price movement contained by a line close to horizontal and the top line slopes down toward the bottom line.
Descending Triangles, Surprise On The Upside
The descending triangle does break down more than it breaks up with this occurring in 57% of the patterns. A downside breakout is profitable 45% of the time delivering an average profit of 0.92% in 9 days. A large number of downside breakouts (12.1%) return in excess of 10% gain.
Specific Setups to Improve Profitability
Short breakouts work better in falling markets which is clear from the results that were achieved in 2002 and 2008, so the market should be falling or consolidating. The best results are achieved trading descending triangles when the sector is falling. For some reason the trend of the sector at the start of the pattern is more important than the trend of the sector prior to the breakout.
Breakouts can occur anywhere along the length of the descending triangle pattern. Another key to picking successful short breakouts from descending triangles is to look for a turning point up from the lower boundary that fails to reach the upper boundary and then falls away.
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 down should be greater than volume when the stock is going up.
Trading Descending Triangles Can Be Profitable
Incorporating these simple changes when selecting descending triangles to trade short, dramatically improves the results. With an average return per trade of 2.55% in 10 days and a hit rate of 48% descending triangles are one of the most profitable patterns to trade on the short side.
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.
