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Until recently, I didn’t have a favorite chart pattern because I considered them just buy or sell
signals. However, I am beginning to show affection for descending triangles with upward breakouts. I’ve made a lot of
money trading this pattern, certainly more than from trading their ascending triangle brothers. Consider trading this
pattern whenever you see it. For more information see pages 711 to 729 of the book
Encyclopedia of Chart Patterns, Second Edition and the following...
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Score your chart pattern for
performance by clicking
here |
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 5 out of
23; 10 out of 21
Break even failure rate for up/down breakouts: 7%; 16%
Average rise/decline: 47%; 16%
Throwback/pullback rate: 37%, 54%
Percentage meeting price target for up/down breakouts: 84%, 54%
Identification Guidelines
|
Characteristic |
Discussion |
|
Price trend |
Can be any direction leading
to the pattern |
|
Shape |
A price pattern bounded by
two trendlines, the bottom one horizontal and the top sloping downward. |
|
Touches |
Price should touch each trendline
at least twice as distinct peaks or valleys. |
|
Crossing |
This is important: Price must
cross the pattern from trendline to trendline, nearly filling the available space. Avoid descending triangles with abundant
white space. |
|
Volume |
Recedes 83% of the time and
gets quite low just before the breakout. |
|
Breakout |
Can be in any direction but
is downward 64% of the time. |
|
Confirmation |
The pattern confirms as a
valid one when price closes outside one of the trendlines. |
Trading Tips
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Trading Tactic |
Explanation |
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Measure rule |
See the figure to the right. Compute the height from the highest peak
(A) to the horizontal trendline
(B) and then multiply it by the above “percentage meeting price target.” Add
(upward breakouts) or subtract (downward breakouts) the difference to the breakout price (the point at which price crosses
the trendline) to get a price target (C). |
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Busted |
Price sometimes breaks out
in one direction and then reverses to bust out in a new direction. Trade the new direction for a powerful move. |
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Breakout |
The average distance to the
breakout is 64% of the way to the triangle apex (where the trendlines join). The most powerful happen 80% to 85% of the way
to the apex. |
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Trend |
Triangles that appear far
up a rising price trend tend to flame out quicker. Look for triangles with upward breakouts near the start of an uptrend. |
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Continuation |
If price rises into the pattern
it breaks out upward 73% of the time. |
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Volume trend |
If volume slopes upward, the
pattern tends to perform better. |
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Yearly low |
Downward breakouts within
a third of the yearly low do well. Upward breakouts show no significant trend. |
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Throwbacks and pullbacks |
Throwbacks and pullbacks hurt performance. |
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 The Measure Rule
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Example
This descending triangle chart pattern obeys the identification guidelines set for the pattern. At point
A, price peaks below the horizontal trendline but few chart patterns are perfect. At
point B, price stages a breakout and that results in a swift upward move. Such a strong
advance is unusual.
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