Triangle Patterns

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Technical Analysts and Chartists like to say what they see, so it comes as no surprise that the triangle patterns clearly form the shape of, well, triangles. The basic construct of this chart pattern is the convergence of two trend lines. Flat, ascending or descending - with the price of the security moving between the two trend lines.

There are 3 types of triangle patterns - The ascending triangle, the descending triangle and the symmetrical triangle. While the shape is important, what’s more important is the direction the market moves once it breaks out of the triangle. Triangle patterns are usually continuation patterns, but occasionally they are reversal patterns. Note. The Triangle is not dissimilar to the wedge pattern that we discovered earlier. The difference between the two is that the wedge points up or down i.e at 45 degrees, while the triangle points sideways. Also, the wedge forms a trend where volatility is contracting and the triangle is a consolidation pattern prior to a break-out.

The Ascending Triangle.

The ascending triangle is a bullish continuation or reversal pattern created by a bottom support line and a top resistance line. The support line is always drawn against a series of ever increasing troughs, while the resistance line is a horizontal line preventing the price from going higher - so higher lows and the same level highs (See Support and Resistance and why they matter).  It can be seen as a continuation of the prior up trend after a consolidation period, as the first chart "Ascending Triangle Continuation" shows, or is seen as a down trend reversal - forming an upside buying opportunity, as the second chart "Descending Triangle Reversal" shows.

As both charts show, the contracting triangle with horizontal resistance means buyers gradually gain control of the market making each subsequent sell-off weaker as the pattern matures. Put another way, the ascending support line gives an indication that sellers are starting to leave the market. After the sellers are knocked out of the market, the buyers can take the price past the resistance level and resume the upward trend. As the pattern develops you'll see that volume contracts then expands on the break.  At the break and beyond buyers take full control, demanding more of the market at ever increasing prices. In general the break will happen 66% of the way through the pattern.

 
Ascending Triangle Continuation Example

Ascending Triangle Reversal Example

Trading The Ascending Triangle
We can look at how we trade the ascending triangle pattern, complete with entry and exit points to establish a profit target. We’ll also look at our stop/loss positions. Remember managing money is one of the most important aspect of trading. In the ascending triangle situation the break-out is always bullish, so it doesn't matter if it's a continuation or a reversal. Both are traded the same way and we are looking for the upper resistance to break.

To establish a target profit from the break we need to measure the distance between the starting high point of the triangle to the starting low point of the triangle, as we've done in both examples above. We then project this value upwards from the break point, giving us our profit target. The stop/loss is placed just below the most recent trough of the pattern and below support. If the stop/loss was placed any higher (above support) we have a greater likelihood of the trade making a loss as the financial instrument may reverse after the break prior to making a move out again.

The Ascending Triangle Continuation Example
  • High to Low Distance of triangle = 16
  • Break-out and buying position = 72
  • Profit target = 72 + 16 = 88. Giving a potential profit of 16 points (minus fees)
  • stop/loss = 63.  Potential loss will be 71 - 63 = 9
  • Risk reward ratio (potential profit as a ratio of potential loss) = 16:9 = (1.8:1)
The Ascending Triangle Reversal Example
  • High to Low Distance of triangle = 4.4
  • Break-out and buying position = 26.2
  • Profit target = 26.2 + 4.4= 30.6. Giving a potential profit of 4.4 points (minus fees)
  • stop/loss = 23.6.  Potential loss will be 26.2 - 23.6 = 2.6
  • Risk reward ratio (potential profit as a ratio of potential loss) = 4.4:2.6 = (1.7:1)
Key Features of The Ascending Triangle
  • A bullish Pattern
  • The ascending triangle is considered a continuation pattern.  Reversals are less common, but exist.
  • A prior trend (usually up) must exist for this pattern
  • Top Resistance must be horizontal and formed by at least 2 peaks of similar heights.
  • Ascending support should be formed by at least two higher lows with distance between them. 
  • Duration lasts for a few weeks to many months.  Usually 1-3 months
  • Break usually occurs 66% into pattern (Not always)
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and adding it to the break.
The Descending Triangle

It’s simply the opposite of the ascending triangle. The resistance line connects a series of lower highs, while the support line consistently holds its support at one level. Traders are looking for this consolidation trend to break on the downside where they will take a short option. As with the ascending triangle it’s very popular among traders as it clearly shows that the demand for an asset is weakening (sellers are taking control) and that a downside movement is imminent.  In a downtrend it’s viewed as a continuation pattern and in an up trend it’s considered as a commanding reversal.  As the reversal is less common I've only charted the descending triangle continuation below, but the premise for both is the same - They are Bearish patterns.  

The first part of this pattern (as shown in our below example) is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher - but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the down trend.  This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower.

USD/CAD Descending Triangle Continuation Example

Trading the Descending Triangle Pattern
Both the continuation and reversal descending triangles play out the same - They are both Bearish, so traders will be looking to short on confirmation of the pattern.  We trade this as a mirror image as the ascending triangles above.  As I've already said, I've only drawn the continuation pattern here, as it's the most commonly found.  Remember, as with all patterns the break isn't guaranteed and losses can be incurred when trading.  You should also form a trading strategy to include other indicators and tools when trading.  
  • High to Low Distance of triangle = 0.0403
  • Break-out and shorting position = 1.00500
  • Profit target = 1.00500 - 0.0403 = 0.9647 Giving a potential profit of 0.0403 points (minus fees)
  • stop/loss = 1.02325.  Potential loss will be 1.00500 - 1.02325 = 0.01825
  • Risk reward ratio (potential profit as a ratio of potential loss) = 2.2:1
Obviously these are small numbers above, so traders will hold more lots or use leverage to make money on this trade.  Your trading supplier will be able to help you here.  Before trading with money though, it will be a good idea to run a few practice accounts - there are lots out there.

Key Features of The Descending Triangle
  • A Bearish Pattern
  • The Descending triangle is considered a continuation pattern.  Reversals are less common, but exist.
  • A prior trend is desirable, before the triangle forms.
  • Top Resistance must be descending and formed by at least 2 peaks with decent distance between them.
  • Horizontal support should be formed by at least two troughs with distance between them. 
  • Duration lasts for a few weeks to many months.  Usually 1-3 months
  • Break usually occurs 66% into pattern (Not always)
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and subtracting from the break.
The Symmetrical Triangle

This pattern is identified by symmetry (as seen in the Transocean chart below) formed by a series of lower peaks and higher troughs. Both the increasing support and declining resistance lines act as barriers in a period of weakening consolidation. You’ll may find this pattern unfolding into directionless market – neither the buyers nor sellers are in control, hence the contracting symmetrical range.  The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend. 

There is no real way of determining the breakout until it happens by analysing the pattern in itself.  More emphasis can be placed on the prior trend to look for a break.  If there is a prior trend then many chartists will consider this a continuation pattern, but it’s not always the case.  If there is a prior down trend then the break will continue through support downwards and if the prior trend is up then resistance of the triangle will be broken in a bullish fashion.  If the pattern does show reversal then a new trend may be starting. Our Transocean example below shows a symmetrical triangle in an up trend (Not instantly recognisable, but higher highs and higher lows were being made).

If you remember from the Pennant patterns if the market moves significantly into the pattern it tends to consolidate prior to continuing the trend, so make sure you know if your looking at a Pennant or Triangle pattern.  A Pennant pattern tends to not only have a sharp move up representing the pole, but be shorter in duration, lasting 1 to 4 weeks.  Triangles last up to many months, both are continuation patterns though.

Transocean - Symmetrical Triangle Continuation Example

The above Transocean chart is an example of a symmetrical triangle that is preceded by an upward trend. The first part of this pattern is the creation of a high in the upward trend, which is followed by a sell-off to a low. The price then moves to another high that is lower than the first high and again sells off to a low, which is higher than the previous low. At this point the trendlines can be drawn, which creates the apex. The price will continue to move between these lines until breakout.

The pattern is complete when the price breaks out of the triangle - look for an increase in volume in the direction of the breakout. This pattern is also susceptible to a return to the previous support or resistance line that it just broke through, so make sure to watch for this level to hold if it does indeed break out.  Throughout the symmetrical triangle volume is likely to decline as buyers and sellers start to drop out awaiting direction.

Trading The Symmetrical Triangle
As mentioned if the symmetrical triangle is found in an up trend or downtrend it may lend more weight to a break to continue that trend. In our above Transocean example we measure the distance between the triangles top and bottom, just like the ascending and descending triangles. This number forms our profit target by adding it to the break.  Our break is to the upside in this example, but it may have been on the downside. If it was to the down side then the height of the triangle would be subtracted from the break. We place our stop/loss just below the most recent trough.  (If the break was on the downside the stop/loss would be placed just above the most recent peak).
  • High to Low Distance of triangle = 9.4
  • Break-out and buying position = 36.2
  • Profit target = 36.2 + 9.4 = 45.6. Giving a potential profit of 9.4 points (minus fees)
  • stop/loss = 32.7.  Potential loss will be 36.2 - 32.7 = 3.5 points
  • Risk reward ratio (potential profit as a ratio of potential loss) = 9.4:3.5 = (2.7:1)
Although our trading examples have traded exactly on the break some traders may apply a price percentage beak, not trading until the price has gone 2 to 3% past the break. They may apply a time filter, leaving it 2 to 3 days just to confirm the break has definitely happened, or they may wait for a full candle for form after the break. Forming a proper trading strategy is a fundamental part of trading.

Key Features of The Symmetrical Triangle
  • The Symmetrical triangle is considered a continuation pattern.  It has been suggested 75% of symmetrical patterns are continuations.  Reversals can exist though, so don't anticipate the break until it happens.
  • A prior trend is desirable before the formation of the pattern.  Usually the prior trend will be a few months old
  • Top Resistance must be descending and formed by at least 2 peaks with decent distance between them.
  • Bottom Support must be ascending and formed by at least 2 troughs with decent distance between them.
  • Duration lasts for a few weeks to many months.  Usually 1-3 months.  If it lasts below 3 weeks it may be a pennant
  • Break usually occurs 50% to 66% into pattern (Not always).  An early break may be premature, a late one less significant.
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and adding or subtracting from the break.
To Sum Up

Traders will look at trend lines for confirmation that these patterns are forming - as with the other patterns we’ve talked about.  For additional confirmation, volume should weaken as the consolidation matures and increases on the break . You can see this in all our example charts above.  As mentioned several times these triangles are mainly continuation patterns, but occasionally they reverse, so don't anticipate the break and wait for confirmation.

Just be aware that these triangle patterns need other technical analysis to figure them out. They can be hard to spot, so use other indicators and tools help identify these patterns.  As always technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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Technical Analysts and Chartists like to say what they see, so it comes as no surprise that the triangle patterns clearly form the shape of, well, triangles. The basic construct of this chart pattern is the convergence of two trend lines. Flat, ascending or descending - with the price of the security moving between the two trend lines.

There are 3 types of triangle patterns - The ascending triangle, the descending triangle and the symmetrical triangle. While the shape is important, what’s more important is the direction the market moves once it breaks out of the triangle. Triangle patterns are usually continuation patterns, but occasionally they are reversal patterns. Note. The Triangle is not dissimilar to the wedge pattern that we discovered earlier. The difference between the two is that the wedge points up or down i.e at 45 degrees, while the triangle points sideways. Also, the wedge forms a trend where volatility is contracting and the triangle is a consolidation pattern prior to a break-out.

The Ascending Triangle.

The ascending triangle is a bullish continuation or reversal pattern created by a bottom support line and a top resistance line. The support line is always drawn against a series of ever increasing troughs, while the resistance line is a horizontal line preventing the price from going higher - so higher lows and the same level highs (See Support and Resistance and why they matter).  It can be seen as a continuation of the prior up trend after a consolidation period, as the first chart "Ascending Triangle Continuation" shows, or is seen as a down trend reversal - forming an upside buying opportunity, as the second chart "Descending Triangle Reversal" shows.

As both charts show, the contracting triangle with horizontal resistance means buyers gradually gain control of the market making each subsequent sell-off weaker as the pattern matures. Put another way, the ascending support line gives an indication that sellers are starting to leave the market. After the sellers are knocked out of the market, the buyers can take the price past the resistance level and resume the upward trend. As the pattern develops you'll see that volume contracts then expands on the break.  At the break and beyond buyers take full control, demanding more of the market at ever increasing prices. In general the break will happen 66% of the way through the pattern.

 
Ascending Triangle Continuation Example

Ascending Triangle Reversal Example

Trading The Ascending Triangle
We can look at how we trade the ascending triangle pattern, complete with entry and exit points to establish a profit target. We’ll also look at our stop/loss positions. Remember managing money is one of the most important aspect of trading. In the ascending triangle situation the break-out is always bullish, so it doesn't matter if it's a continuation or a reversal. Both are traded the same way and we are looking for the upper resistance to break.

To establish a target profit from the break we need to measure the distance between the starting high point of the triangle to the starting low point of the triangle, as we've done in both examples above. We then project this value upwards from the break point, giving us our profit target. The stop/loss is placed just below the most recent trough of the pattern and below support. If the stop/loss was placed any higher (above support) we have a greater likelihood of the trade making a loss as the financial instrument may reverse after the break prior to making a move out again.

The Ascending Triangle Continuation Example
  • High to Low Distance of triangle = 16
  • Break-out and buying position = 72
  • Profit target = 72 + 16 = 88. Giving a potential profit of 16 points (minus fees)
  • stop/loss = 63.  Potential loss will be 71 - 63 = 9
  • Risk reward ratio (potential profit as a ratio of potential loss) = 16:9 = (1.8:1)
The Ascending Triangle Reversal Example
  • High to Low Distance of triangle = 4.4
  • Break-out and buying position = 26.2
  • Profit target = 26.2 + 4.4= 30.6. Giving a potential profit of 4.4 points (minus fees)
  • stop/loss = 23.6.  Potential loss will be 26.2 - 23.6 = 2.6
  • Risk reward ratio (potential profit as a ratio of potential loss) = 4.4:2.6 = (1.7:1)
Key Features of The Ascending Triangle
  • A bullish Pattern
  • The ascending triangle is considered a continuation pattern.  Reversals are less common, but exist.
  • A prior trend (usually up) must exist for this pattern
  • Top Resistance must be horizontal and formed by at least 2 peaks of similar heights.
  • Ascending support should be formed by at least two higher lows with distance between them. 
  • Duration lasts for a few weeks to many months.  Usually 1-3 months
  • Break usually occurs 66% into pattern (Not always)
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and adding it to the break.
The Descending Triangle

It’s simply the opposite of the ascending triangle. The resistance line connects a series of lower highs, while the support line consistently holds its support at one level. Traders are looking for this consolidation trend to break on the downside where they will take a short option. As with the ascending triangle it’s very popular among traders as it clearly shows that the demand for an asset is weakening (sellers are taking control) and that a downside movement is imminent.  In a downtrend it’s viewed as a continuation pattern and in an up trend it’s considered as a commanding reversal.  As the reversal is less common I've only charted the descending triangle continuation below, but the premise for both is the same - They are Bearish patterns.  

The first part of this pattern (as shown in our below example) is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher - but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the down trend.  This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower.

USD/CAD Descending Triangle Continuation Example

Trading the Descending Triangle Pattern
Both the continuation and reversal descending triangles play out the same - They are both Bearish, so traders will be looking to short on confirmation of the pattern.  We trade this as a mirror image as the ascending triangles above.  As I've already said, I've only drawn the continuation pattern here, as it's the most commonly found.  Remember, as with all patterns the break isn't guaranteed and losses can be incurred when trading.  You should also form a trading strategy to include other indicators and tools when trading.  
  • High to Low Distance of triangle = 0.0403
  • Break-out and shorting position = 1.00500
  • Profit target = 1.00500 - 0.0403 = 0.9647 Giving a potential profit of 0.0403 points (minus fees)
  • stop/loss = 1.02325.  Potential loss will be 1.00500 - 1.02325 = 0.01825
  • Risk reward ratio (potential profit as a ratio of potential loss) = 2.2:1
Obviously these are small numbers above, so traders will hold more lots or use leverage to make money on this trade.  Your trading supplier will be able to help you here.  Before trading with money though, it will be a good idea to run a few practice accounts - there are lots out there.

Key Features of The Descending Triangle
  • A Bearish Pattern
  • The Descending triangle is considered a continuation pattern.  Reversals are less common, but exist.
  • A prior trend is desirable, before the triangle forms.
  • Top Resistance must be descending and formed by at least 2 peaks with decent distance between them.
  • Horizontal support should be formed by at least two troughs with distance between them. 
  • Duration lasts for a few weeks to many months.  Usually 1-3 months
  • Break usually occurs 66% into pattern (Not always)
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and subtracting from the break.
The Symmetrical Triangle

This pattern is identified by symmetry (as seen in the Transocean chart below) formed by a series of lower peaks and higher troughs. Both the increasing support and declining resistance lines act as barriers in a period of weakening consolidation. You’ll may find this pattern unfolding into directionless market – neither the buyers nor sellers are in control, hence the contracting symmetrical range.  The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend. 

There is no real way of determining the breakout until it happens by analysing the pattern in itself.  More emphasis can be placed on the prior trend to look for a break.  If there is a prior trend then many chartists will consider this a continuation pattern, but it’s not always the case.  If there is a prior down trend then the break will continue through support downwards and if the prior trend is up then resistance of the triangle will be broken in a bullish fashion.  If the pattern does show reversal then a new trend may be starting. Our Transocean example below shows a symmetrical triangle in an up trend (Not instantly recognisable, but higher highs and higher lows were being made).

If you remember from the Pennant patterns if the market moves significantly into the pattern it tends to consolidate prior to continuing the trend, so make sure you know if your looking at a Pennant or Triangle pattern.  A Pennant pattern tends to not only have a sharp move up representing the pole, but be shorter in duration, lasting 1 to 4 weeks.  Triangles last up to many months, both are continuation patterns though.

Transocean - Symmetrical Triangle Continuation Example

The above Transocean chart is an example of a symmetrical triangle that is preceded by an upward trend. The first part of this pattern is the creation of a high in the upward trend, which is followed by a sell-off to a low. The price then moves to another high that is lower than the first high and again sells off to a low, which is higher than the previous low. At this point the trendlines can be drawn, which creates the apex. The price will continue to move between these lines until breakout.

The pattern is complete when the price breaks out of the triangle - look for an increase in volume in the direction of the breakout. This pattern is also susceptible to a return to the previous support or resistance line that it just broke through, so make sure to watch for this level to hold if it does indeed break out.  Throughout the symmetrical triangle volume is likely to decline as buyers and sellers start to drop out awaiting direction.

Trading The Symmetrical Triangle
As mentioned if the symmetrical triangle is found in an up trend or downtrend it may lend more weight to a break to continue that trend. In our above Transocean example we measure the distance between the triangles top and bottom, just like the ascending and descending triangles. This number forms our profit target by adding it to the break.  Our break is to the upside in this example, but it may have been on the downside. If it was to the down side then the height of the triangle would be subtracted from the break. We place our stop/loss just below the most recent trough.  (If the break was on the downside the stop/loss would be placed just above the most recent peak).
  • High to Low Distance of triangle = 9.4
  • Break-out and buying position = 36.2
  • Profit target = 36.2 + 9.4 = 45.6. Giving a potential profit of 9.4 points (minus fees)
  • stop/loss = 32.7.  Potential loss will be 36.2 - 32.7 = 3.5 points
  • Risk reward ratio (potential profit as a ratio of potential loss) = 9.4:3.5 = (2.7:1)
Although our trading examples have traded exactly on the break some traders may apply a price percentage beak, not trading until the price has gone 2 to 3% past the break. They may apply a time filter, leaving it 2 to 3 days just to confirm the break has definitely happened, or they may wait for a full candle for form after the break. Forming a proper trading strategy is a fundamental part of trading.

Key Features of The Symmetrical Triangle
  • The Symmetrical triangle is considered a continuation pattern.  It has been suggested 75% of symmetrical patterns are continuations.  Reversals can exist though, so don't anticipate the break until it happens.
  • A prior trend is desirable before the formation of the pattern.  Usually the prior trend will be a few months old
  • Top Resistance must be descending and formed by at least 2 peaks with decent distance between them.
  • Bottom Support must be ascending and formed by at least 2 troughs with decent distance between them.
  • Duration lasts for a few weeks to many months.  Usually 1-3 months.  If it lasts below 3 weeks it may be a pennant
  • Break usually occurs 50% to 66% into pattern (Not always).  An early break may be premature, a late one less significant.
  • Volume should contract when the pattern forms then expand on the break.  (Desirable)
  • The target is measured by taking the distance between the widest section and adding or subtracting from the break.
To Sum Up

Traders will look at trend lines for confirmation that these patterns are forming - as with the other patterns we’ve talked about.  For additional confirmation, volume should weaken as the consolidation matures and increases on the break . You can see this in all our example charts above.  As mentioned several times these triangles are mainly continuation patterns, but occasionally they reverse, so don't anticipate the break and wait for confirmation.

Just be aware that these triangle patterns need other technical analysis to figure them out. They can be hard to spot, so use other indicators and tools help identify these patterns.  As always technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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