The descending triangle is a triangular consolidation zone that hasa hypotenuse sloping downward at the top of the triangle. Beneath thehypotenuse is a straight trend line. Generally, when the market breaksthrough this trend line, it is seen as a signal that sellers have themomentum in the market, and that shorting may be a good opportunity asa result. Accordingly, it can reasonably be stated that the descendingtriangle usually appears in a downward trending market and signals acontinuation of the downward trend.
Ascending Triangles
As you might expect, the ascending triangle usually appears in anupward trend - and signals the continuation of the upward trend. Theascending triangle is essentially an inverted descending triangle; ithas a hypotenuse that moves upward with time, above which is a straighttrend line that traders are eyeing carefully as a key resistance point.When this confirmation of that resistance has broken is received, itcan be a signal that buyers have taken control of the market - hencemaking it an ideal time to buy.
In the chart below, USD/CHF formed an ascending triangle over 5 daysbefore the release of an important economic data. The price tested theresistant level 1.2545 for three times before breakthrough. On thehypotenuse side, the buying momentum pushed the support level furtherup which formed the converging ascending triangle. Once the economicdata was released, the price broke the resistance and shot further up.
The converging triangles, no matter descending or ascending,represents the psychology of traders on the market. Before thebreakout, traders are not sure which direction the price will go, theyare trading with great caution, and thus, reflected by the narrowtrading range before the breakout. The range will get narrower astraders are getting more cautious before the final breakout. Once thedirection of breakout is conformed, the followers will enter the marketfollowing the direction, which forms the strong momentum after thebreakout.
Ultimately, the important signal provided by the triangle is not theshape, though. The signal is provided by the direction of the breakoutfrom the triangle, which signals a continuation or sometimes a reversalof the trend.