Triangles are common chart patterns that form when the price of an asset consolidates, typically indicating a period of indecision in the market. These patterns are formed by drawing trendlines along converging price points, which resemble a triangle. Triangles are generally considered continuation patterns, although they can occasionally signal a reversal depending on the breakout direction. The three main types of triangles are symmetrical triangles, ascending triangles, and descending triangles. Each type has distinct characteristics and market psychology, making them valuable tools for traders seeking to anticipate future price movements.
Symmetrical Triangle
Definition: A symmetrical triangle is a pattern that forms when the price is squeezed between a rising support line and a falling resistance line. The trendlines converge, reflecting a narrowing price range. This pattern is neutral, meaning it does not inherently suggest a direction for the next move; the breakout can occur to the upside or downside. The symmetrical triangle looks similar to a pennant but typically forms over a longer period.
Psychology: The symmetrical triangle reflects a period of market equilibrium, where neither buyers nor sellers have full control. As the price makes higher lows and lower highs, it indicates a tightening range and decreasing volatility. This suggests that both buyers and sellers are becoming more cautious, awaiting a clearer direction before committing to their next move. The market is essentially in a state of consolidation, and the breakout from the triangle usually happens when one side finally gains enough momentum to overpower the other. Since this pattern is neutral, traders should be prepared for a breakout in either direction. A breakout above the resistance line typically signals a bullish move, while a breakout below the support line suggests a bearish move.
Entry and Profit Points: When trading a symmetrical triangle, the ideal entry point is slightly above the resistance line for a potential bullish breakout or slightly below the support line for a potential bearish breakout. To set a profit target, measure the height of the triangle at its widest point (the distance between the initial high and low). Project this distance from the breakout point in the direction of the breakout to determine the expected price move.
Figure: Trading a symmetrical triangle.
Ascending Triangle
Definition: An ascending triangle is a bullish continuation pattern that forms when the price is bounded by a horizontal resistance line on the top and an upward-slanting support line on the bottom. This pattern indicates that buyers are gradually gaining strength, as evidenced by the rising support, while sellers are holding firm at a particular resistance level.
Psychology: The ascending triangle reflects a bullish sentiment in the market, where buyers are increasingly willing to purchase at higher prices, resulting in a series of higher lows. Despite this buying pressure, the sellers are consistently selling at a particular resistance level, creating a flat top. This scenario indicates a buildup of buying pressure, which often leads to a breakout above the resistance level as buyers eventually overpower the sellers. While the ascending triangle generally signals a continuation of the existing uptrend, it’s important to note that the market can sometimes break to the downside if sellers manage to gain control. However, breakouts to the upside are more common.
Entry and Profit Points: The ideal entry point for trading an ascending triangle is slightly above the resistance line, anticipating a breakout to the upside. To set a profit target, measure the height of the triangle (the distance between the horizontal resistance and the lowest point of the rising support line) and project this distance from the breakout point upwards.
Figure: Trading an ascending triangle.
Descending Triangle
Definition: A descending triangle is a bearish continuation pattern that forms when the price is bounded by a horizontal support line on the bottom and a downward-slanting resistance line on the top. This pattern indicates that sellers are gradually gaining strength, as evidenced by the falling resistance, while buyers are holding firm at a particular support level
Psychology: The descending triangle reflects a bearish sentiment in the market, where sellers are increasingly willing to sell at lower prices, resulting in a series of lower highs. Despite this selling pressure, buyers are consistently buying at a particular support level, creating a flat bottom. This scenario indicates a buildup of selling pressure, which often leads to a breakout below the support level as sellers eventually overpower the buyers. While the descending triangle generally signals a continuation of the existing downtrend, it’s important to note that the market can sometimes break to the upside if buyers manage to gain control. However, breakouts to the downside are more common.
Entry and Profit Points: The ideal entry point for trading a descending triangle is slightly below the support line, anticipating a breakout to the downside. To set a profit target, measure the height of the triangle (the distance between the horizontal support and the highest point of the falling resistance line) and project this distance from the breakout point downwards.
Figure: Trading a descending triangle.
When Price Goes In An Unexpected Direction
Like all other patterns we have discussed, when analyzing and trading with triangular patterns in the financial markets, it’s crucial to recognize that these patterns do not always adhere to the standard or expected breakout behavior. Sometimes price can break out in the opposite direction from what was initially anticipated. An unanticipated breakout can be particularly disorienting, but it can also provide lucrative trading opportunities if approached with the right strategies. Here is how you can trade the markets when price makes a break on the complete opposite side.
Figure: When price breaks in an unanticipated direction.
We are sorry to do this to you; leaving this lesson until the end of the chart patterns section. The point here is that you should anticipate the breakout to be on either side, as this can offer more trading opportunities. However, you should take precautions when the breakout is in the unexpected direction. You can take these precautions by referring to the following key considerations when it comes to trading triangles.
Key Considerations for Trading Triangles
- Volume Confirmation: As with most chart patterns, volume is an important factor in confirming the validity of a triangle breakout. During the formation of the triangle, volume typically decreases, reflecting a period of consolidation and indecision. However, a significant increase in volume during the breakout phase indicates strong market interest and can confirm the validity of the breakout.
- Timeframe and Context: Triangles can form over various timeframes, from intraday charts to long-term charts. While the basic principles of trading triangles apply across all timeframes, patterns on higher timeframes generally indicate more significant moves. Additionally, consider the broader market context and other technical indicators when trading triangles to avoid false breakouts and improve trading decisions.
- Breakout Direction: Although symmetrical triangles are neutral and can break in either direction, ascending triangles are more likely to break upwards, and descending triangles are more likely to break downwards. However, it’s essential to be prepared for both outcomes and have a well-defined trading plan in place.
- Risk Management: Always use proper risk management techniques when trading triangles. Place stop-loss orders just outside the opposite side of the triangle from the entry point to protect against false breakouts and minimize potential losses. This strategy ensures that traders can exit trades quickly if the market moves against them.
- Pattern Recognition: Successfully trading triangles requires practice and experience in identifying these patterns on live charts. Studying historical data and practicing with demo accounts can help traders improve their ability to spot and trade triangles effectively.
- Look for Confirmation: Before fully committing to a trade based on the unexpected breakout, seek additional confirmation from other technical indicators or analysis tools. For instance, you might look for confirmation from trendlines, moving averages, or oscillators to validate the new breakout direction.
By understanding and effectively trading triangle patterns, traders can take advantage of these continuation patterns to capitalize on potential breakouts and trend continuations. Practicing these setups on historical data and refining your skills can improve your ability to recognize triangles and make informed trading decisions in real-time.