When  people look for ascending triangles, descending triangles, and cups-with-handles, they often think that they have to be used for huge multiple-day moves. Why not use these patterns for daytrades? It seems so logical to me: Enter a position on the initial move and lock in your gains before the day ends. Personally, I like to sleep easy, without any positions on the brain.

Many daytraders only take positions based on patterns that they find on intraday charts, such as a five-minute chart. I find that it is better to use a combination of intraday setups and daily setups. Why limit yourself to what you find in the middle of the day? Why not use those same patterns that you would for a swing trade, and daytrade them? The descending triangle is a perfect example of this type of pattern.

The Descending Triangle Defined

The descending triangle is a pattern that can be formed over several days or several weeks, and it looks just like it sounds. As with any pattern, the strength of the formation grows with the amount of time that it takes to form. There is more support behind a triangle that forms over three weeks than one that forms over three days.

This type of triangle is formed when a specific support area is tested a minimum of three times, but ideally, at least five times. While support is being tested, each price bar following the first bar in the series should show a lower low. This means that each consecutive price bar must not trade as high as the previous high.

Of course, this is merely a textbook description of the setup. What you find in the modern-day, and currently choppy, market may have several price anomalies.

Using the Ascending Triangle For Daytrading

Often in my writings you'll notice that I mention that swing traders should wait to open a position on the day following the breakout, because so many moves only last for one day and fail. These moves are what I refer to as "false breakouts." Daytraders, on the other hand, are usually looking to go home flat at the end of each day, and thus are not subject to many of the problems resulting from holding failed breakouts from daily patterns overnight. As a daytrader, I would prefer to lock in my gains each day, and rest easy. That is not to say that I will never hold a position overnight.

Placing Your Stops

Consider placing an initial stop just over the support level that was broken, because if the stock retraces, it should, ideally, not rise back above support. If it does break this key level, then it may be that the setup has been invalidated. Of course, there is no mechanical system for stop placement. In some cases, you may be stopped out only to see the stock fall back below support. At this point, you need to re-evaluate the formation, to determine if a second entry is appropriate. It is crucial to all trading to choose a stop loss point before opening any position.

Real World Examples

The example of Redback Networks applies to both daytraders and swing traders. After surging lower (point 1) for three consecutive days, the stock finally settled into a mini-consolidation. For the next six days it set a series of lower highs as it continued to test the same resistance level (point 2). Finally, it broke down below the trading range (point 3), and a short position is opened. After going short, a trader would place his initial buy-stop just over the support level.

The daytrader would have ridden the stock lower, trailing his stop in accordance with the intraday charts, as he searches for a prudent exit point.

A swing trader could have followed the position down almost 40 points, trailing his stop based on price movement.

In this example, I did not see a move below support on strong volume, so I would tend not to hold the position overnight. I like to see the stock trade below support on double the average volume (or greater).

Conclusion

This pattern, like its counterpart, seems so simple, but you may find that it leads to consistent gains. A chart pattern is a chart pattern is a chart pattern. Traders should not limit themselves to applying chart patterns only to specific stocks and specific time frames. By expanding your use of patterns and looking to applying them to different charts, you will open yourself to more opportunities. Remember, as daytraders, it is always good to have numerous ideas for each trading day.

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