Descending Triangle Chart Pattern | Demand Index Indicator

Overview

A Descending Triangle chart pattern is a continues price formation; when combined with a Demand Index Indicator properly, over 75% of our trading positions will be profitable. By definition, the Descending Triangle chart pattern indicate a sell pressure; You can see visually that the sellers sell at lower prices as time progress (A,B and C).

Professional trader will use Demand Index indicator in several ways. I will focus on this indicator ability to predict trend strength, so, if the indicator stays near the level of zero for any length of time (see blue rectangle in chart - lower window) we can anticipate a price breakout.

Case study - NASDAQ-100 Index Tracking Stock ETF (QQQQ) Bar Chart



Indicators and Parameters:
Descending Triangle chart pattern - continues (red) - normally formed in a few week period, and consist from an upper descending resistance line (A-B-C) and support line (2).
Demand Index (red; lower window) - calculated by the change in price and volume alike.

How to use the Descending Triangle chart pattern - practical analysis:

The first step is to recognize we are dealing with Descending Triangle price formation, to do that we must identify:

1. Descending resistance line with two or more reaction points (points A-B-C).


2. Support line (2), horizontal line, with two or more reaction points.

Second, we have to define our profit target by finding the delta between line 1(green) price level and line 2(red) price level. In our case, the delta equal 1.75 points (43.05-41.30). So, line 2(red), the support line, minus the delta equal our profit target at 39.55 (blue line #3).

Point D - This is our entry point.
The short order entry price is 41.05 and our stop-loss order price is 41.55; why?

Very important: we determine our profit target and stop-loss orders with the assistance of mathematical calculations. First, we anticipate a winning ratio of 75%, i.e. we will win with this strategy 3 times out of 4, and second, we want at least 1 to 3 win/loss ratio.

So, we will divide our delta (1.75) by 7 and use the triangle support line(2) as our pivot price level (41.30). Then, we calculate our orders price, 41.30 minus 0.25 = 41.05 as our entry, and 41.30 plus 0.25 = 41.55 as our stop-loss.

Point E - We closed our short position at 39.55 - profit target.

Note: Because descending triangle is a bearish pattern which indicates distribution of money, the combination with Demand Index indicator is a very powerful one.

Descending Triangle Chart Pattern

In order to qualify as a descending pattern, at least two reaction highs are required to form the upper trend line (in our case - three). Also, at least two reaction lows required to form the support horizontal line.

Basically, the trader must see a visual Triangle chart pattern emerging from his price chart.