The Triangle Chart Pattern

Posted in: Trading Article

One of the most popular chart patterns in technical analysis is the triangle pattern.  The triangle pattern is considered a consolidation price pattern, generally a continuation pattern, where the range of price gets tighter.

This getting tighter is an indication of lower volatility and there will eventually be a resolution from the triangle pattern and those moves are often explosive.

The general rule of thumb when trading any breakout from a triangle is,  do not attempt to fade the break.  You are dealing with a market that has undergone range contraction and the move from the patterns can often never look back.

 

Types Of Triangles

There are three forms that a triangle pattern takes and as with all chart patterns, they are not always picture perfect:

  1. Symmetrical triangle can be either a continuation or a reversal pattern
  2. Ascending triangle is considered a bullish pattern where higher lows are made as the triangle forms
  3. Descending triangle is considered a bearish pattern where lower highs are made during the formation

Symmetrical Triangle Pattern

The symmetrical triangle is a tricky one as the price moves don’t tip the markets hand – we can expect either a continuation of the current trend or a trend reversal.

symmetrical triangleThe first leg appears to be a normal impulse price move with the down leg being the corrective decline.  If we consider an uptrend pattern, we fully expect the higher low to be put in place.

The tip off of a potential triangle forming is when we fail to make a new high.  Price then puts in a price structure that does not resemble trending price action:

  • Up trends are higher highs and higher lows
  • Down trends are lower highs and lower lows
  • Symmetrical patterns violate the trending price structure

Notice as each price swing in the asset meets opposite pressure, the swings actually decrease in size as price heads towards the apex (where the 2 ends of the trend lines meet).

Trading these triangles are tricky however there can be times where price will give hints to the breakout point.  Generally looking for longer shadows or failure tests of the support or resistance trend lines can be enough to convince a trader to place a trade.

Placing the trade before the breakout occurs can lead to quick gains in your trade when the momentum takes over.  Failing that, traders can use the following techniques to place a trade after the breakout:

  • Bull flags
  • Bear flags
  • Other triangle patterns
  • Ranges

Keep in mind that “false” breakouts can occur to trap traders.  Always ensure you use proper risk management when trading any strategy or pattern.  Due to the nature of this pattern, using below support or above resistance level for stop loss locations can be difficult to the sloping nature of those levels.

In those cases, consider using ATR types of stop losses or below the widest portion of the triangle.

When considering price targets for profits, a rule of thumb is the height of the triangle pattern at the widest point is projected from the breakout point.

Traders will also use the breakout direction as confirmation of a trend direction including a reversal.  They would then use their own tactics to trade the market.

Ascending Triangle Pattern

The ascending triangle is a bullish pattern and traders would expect an upside breakout point through resistance.

ascending triangle

The features of this chart pattern is successive higher lows into a defined resistance zone at swing highs. The higher swing lows show that buyers are stepping in to buy the asset at higher prices, a bullish scenario.

What is vital to understand is even though buyers are unable to bring prices higher over the resistance level, the higher lows tip the odds to an upside breakout.

Many traders will position prior to the breakout during the swing low portion of the formation of the ascending triangle.

Horizontal Range

There will be times where markets makes a horizontal range where both support and resistance are tested.  Trading inside of ranges can be a painful experience but we can use the ascending triangle to give us an indication of the potential breakout point.

trading triangle within horizontal rangesAfter multiple tests of support, finding an ascending triangle inside of what was a horizontal range, adds to the upside breakout point.

Traders can position inside the triangle with a stop below the lowest point of the triangle.  This will have traders position before the breakout which can lead to fast upside gains without playing the actual breakout which can lead to slippage.

We are also able to avoid large losses if there is a failed breakout as we should have some profits already in the trade.

Descending Triangle Pattern

This pattern will show a pattern of lower highs into a support level where swing lows have been rejected.

The inability of sellers to push price lower does not negate a downside breakout as the lower highs are showing selling at cheaper prices.  The lack of upside strength is the defining feature of the descending triangle.

descending trianglePrice coils as the lower highs are place while the lows remain in roughly the same general area.

Traders can position after two swing lows or use the breakout as confirmation of the trend.

The descending triangle can also be used in a horizontal range as described earlier.

 

Triangle Chart Pattern Summary

While these graphics are an idealized depiction of triangles, it is the concept that matters in relation to:

  • Evolution of price – swing highs and lows into the support or resistance zone
  • Coiling feature of the triangle pattern
  • The bull and bear battle that takes place

Trading the triangles in horizontal ranges may need traders to use a slightly lower time frame especially when using higher time frames.  Using the triangles to position before the breakout of the range is a favorite trading technique of mine.

Like any trading tactic, triangles and their breakouts do fail.  It is important to understand what a failure is for a triangle and that would be sudden momentum coming in and wiping out the higher lows for an ascending triangle.

The triangle pattern is another tool you can use to define the market state you are in.  Using your own tactics upon the breakout or trading the pattern itself is something you may want to consider


The following two tabs change content below.

CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

Latest posts by CoachShane (see all)

DOWNLOAD THIS POST AS A PDF - CLICK HERE -

Leave a Reply

Your email address will not be published. Required fields are marked *

* :

* :

* :

:

This site uses Akismet to reduce spam. Learn how your comment data is processed.