Triangle chart patterns are usually identified by traders when the trading range of a stock price narrows following a downtrend or uptrend. While other chart patterns indicate a clear direction to the upcoming price movement, triangle chart patterns can signal either a reversal of the previous trend or a continuation.
Technical analysis categorizes a triangle pattern as a continuation pattern. This indicates that once the pattern completes, it is assumed that the price will continue moving in the trend direction as it was before the pattern emerged.
Trading triangles can tell immensely about the asset’s volatility as well as the trading opportunities that lie ahead. They have three main types. However, not all can be interpreted the same way, which is why it’s necessary to understand every triangle chart pattern individually.
Triangle Chart Patterns Explained
Triangle patterns are rightly named because the two trend lines eventually meet at the apex on the right side and form a corner. The other two corners complete the triangle when the beginning point of the upper trend line is connected to the beginning of the lower trend line. Connecting the highs forms the upper trend line while connecting the lows forms the lower trend line.
Triangles are like pennants and wedges. They can be a powerful reversal pattern in case of a failure or a continuation pattern if validated.
They have three triangle variations, which can form as price action develops a holding pattern – symmetrical, ascending, and descending. Technical traders witness a failure or breakout of a triangle pattern, particularly on heavy volume, because potent bullish/bearish indicates reversal or resumption of the previous trend.
Ascending Triangle Pattern
Ascending triangles are a type of triangle chart pattern that develops after an uptrend. It has a rising lower line due to accumulation and is always considered bullish, which anticipates a rise in trading volume and price movement. However, being a continuation pattern, it indicates that good time will recommence once the resistance line is broken.
Besides recognizing the future direction of price action, ascending triangles can indicate the perfect time to enter and exit trades. So spotting them helps you find new chances for profitable trades. This can be done by looking for a market, which was trending upward, but is deflecting from a horizontal resistance level now. Their lows, however, must rise steadily every time, producing an upward-sloping support line.
This period of consolidation cannot last long, and the market, at some point, will have to break out beyond either line. The pattern is completed, and the uptrend will resume if it breaks out upwards. On the other hand, the pattern fails, and the market can undergo reversal if it breaks out below the support.
Descending Triangle Pattern
The descending triangle pattern is the inverted version of the ascending triangle. It occurs in a bearish market and is always a bearish pattern.
The lower trendline must be horizontal, connecting almost identical lows. Its upper trendline falls diagonally towards the apex. The breakdown happens when the price breaks through the lower horizontal support trendline as a downtrend recommences. The lower trendline, which was earlier the support, now becomes resistance.
Though both ascending and descending triangles usually indicate the beginning of an uptrend and a downtrend respectively, the price can still possibly bounce off the horizontal line, resulting in the reversal of a prior trend. So it is mostly better to wait till the pattern is completed before making any trade decisions.
Symmetrical Triangle Pattern
The formation of a symmetrical triangle chart pattern is quite prim and proper. Both trend lines come together at the same slope. This type is mostly used as the common pattern for triangle chart patterns as it has a very recognizable and clear shape.
Symmetrical triangles occur when the price begins moving up and down in a limited range, which gets tighter and tighter over time. Its peak gradually becomes lower while its trough keeps going higher than the earlier one.
These triangles usually appear in those markets that do not move in one direction. There is no single trend dominating this market, enabling sellers and buyers to influence price actions equally and make a consolidation period.
A symmetrical triangle pattern can occur in both uptrend and downtrend. A breakout in an uptrend through resistance indicates a continuation, while a breakout through support indicates a reversal. The opposite is true for a downtrend. The bear market can continue if resistance is broken, and a reversal may occur if support is broken.
Important Points for Trading with Triangle Chart Patterns
- A triangle pattern is formed when the price begins to move in a constantly narrowing range. This range gets limited by two trendlines drawn through the troughs and peaks of the pattern that represent resistance and support.
- Triangle chart patterns have three main variations – ascending, descending, and symmetrical.
- They are usually considered a continuation pattern; however, they can appear before a trend reversal.
- Their most common trading strategy is to wait for a price break out and then enter a trade in the direction of the movement of the market. For the exit, once the triangle chart pattern is created, the price usually moves nearly the same distance as the height of the pattern. So you may plan your next action and get ready to gain profits.
Trading Ascending & Descending Triangle Patterns
The ascending and descending triangle patterns are bullish and bearish respectively and are generally considered continuation patterns. This means the market will continue to move in the same direction after the breakout, just the way it was before the formation of the pattern.
But this can’t always be the case. One of the trend lines can be bounced off by the price, and the trend can be reversed altogether. Considering this, the safest trading strategy for these patterns is to wait for a breakout to occur and go in whichever direction the price action goes next.
The above chart of NZDUSD shows an ascending triangle between a horizontal resistance line at 0.7314 along with a sloping support line. We opened the position after the resistance was broken at 0.7333. After that, we put the Stop Loss at 0.7225, which was 10 points lower than the lowest point of the triangle, and took the profits at 0.7413 after identifying the preceding triangle pattern’s height (0.7314-0.7234=0.08).
The below chart shows the trading strategy for a descending triangle pattern.
The consolidation at the top of the upper trendline shows that bulls cannot force the price higher. Therefore, a descending triangle was formed where the support line stayed at 0.7470. We entered the market at the breakout point of the support, so we put a small order at 0.7455. We then put a Stop Loss to lower the risks 10 points higher than the last triangle peak at 0.7534 and placed a Take Profit order at 0.7367.
Trading Symmetrical Triangle Patterns
As discussed earlier, symmetrical triangles can be both bullish and bearish. They have equal positions, meaning the price can move in either direction.
You can put entry orders just below the support line, and above the resistance line. This way, you’ll enter the trade automatically without worrying about which direction the market will move next. Or you can wait for a breakout to occur, and see where the price eventually moves and then move with the flow.
In the chart of EURUSD, a symmetrical triangle pattern can be seen at the intersection of a downward line in a large downtrend and a rising trend line. We waited for the breakout after the formation of the pattern, either to the downside or upside. In the chart, the resistance line was broken, and we entered at 1.3355. We put a Stop Loss at 10 points lower than the lowest point of the triangle (1.2324). As mentioned earlier, the price movement is the same as the pattern’s height. We measured the distance between the lowest and highest points of the pattern. 1.3294-1.2334=0.096. Next, we could determine the perfect position to gain profits (1.3355+0.096=1.4315) and put an exit order.
Conclusion
Triangle patterns are one of the most commonly appearing chart patterns that predict the continuation of market direction. Just like any other technical indicator, using them successfully comes down to due diligence and patience. Traders should keep in mind that it is hard to predict market movements and it can quickly change directions. This is why wise traders prefer to wait for the breakout before attempting to trade with these triangles with real money.
