Technical traders acknowledge a wide variety of patterns in the trading chart to interpret market momentum. Triangles are one of the most recognised patterns in technical trading charts. In technical analysis, a triangle is a continuation pattern (often) appearing at the end of a strong trend when the market moves sideways before breaking out to continue in the same direction.
There are mainly three triangle patterns that traders acknowledge – ascending, descending, and symmetrical triangle. They can appear in any timeframe. Let’s see how to interpret different triangle formations in a trading chart.
How to recognise a triangle in a trading chart
Triangles appear after the market rallies strongly for some time (upward or downward) and move sideways in a tight range. Triangles are continuation pattern, means the market stalls to gather steam before a breakout/breakdown.
These are similar to wedges and pennants, but in triangle formations, the trendlines converge at the end.
At the beginning of the formation, there are high swings in price, and hence, the triangle has a broad opening. As the pattern progresses, trading narrows and both the demand and supply side lose impetus. The lower and upper trendlines converge to form a triangle.
In the presence of solid buying forces, the low trend line continues to rise, and we get an upward sloping lower line. Similarly, the upper trend line represents an overbought situation where buyers would take out a profit. When demand wanes, the supply also declines, and as a result, we get a downward sloping upper trend line in the chart.
Chartists connect all the lows to form the lower trend line and the highs to draw the resistance. An ascending triangle that appears during a bullish market has an upward rising support line formed by continuously rising lows and flat resistance.
It is easy to recognise, especially when preceded by an established upward trend, offers entry and exit signals. It indicates buying force in the market, but it is not strong enough to break the resistance.
How to interpret an ascending triangle
An ascending triangle indicates that the uptrend has stalled, but the asset’s demand is still growing. The trend will continue till the lower trendline closes the gap with the upper trendline and eventually break into a strong trend, supported by a surge in volume. The breakout establishes the second leg of the movement.
A descending triangle appears in the downtrend and an inverted version of the ascending triangle. The lower support line is horizontal or flat when the upper trendline declines to meet with the lower line.
A descending triangle depicts a situation when sellers are growing anxious to offload. The sentiment will continues for a while until sellers grow impatient and break through the support line. It establishes the second leg of the downtrend and forms new lows.
Symmetric triangle formation appears when the market is directionless for the most part and moves in a tight range. It is a trend continuation pattern, which can occur in both bullish and bearish trend. The breakout can happen on either side.
The aimlessness of the market indicates that neither buyers nor sellers have control of the market and the highs and lows seem to come together. There is also no significant movement in volume. Hence, when a breakout happens (north or south of the pattern), it is usually accompanied by a substantial shift in volume.
A breakout typically occurs in the direction of the existing trend, so traders wait until the formation completes to take a position.
Failure Of Triangle Continuation Pattern
In 80 percent of cases, triangles are continuation patterns, and breakouts happen in the prevailing trend’s direction. But there are also exceptions, called triangle failures, where a triangle pattern denotes a trend reversal. It occurs when the breakout occurs in the opposite direction of the existing trend. In such cases, traders must wait for breakout confirmation and alter their positions in the direction of the trend.
How to trade triangle
Triangle patterns can give indications for a potential trade, like for a symmetrical triangle, traders measure the distance between the upper and lower trendlines to predict a breakout. Interpreting a triangle pattern is about understanding what the market is trying to communicate through price action.
Triangles are moments of market consolidation. Before a strong breakout, both buyers and sellers weigh each other to determine the direction of the breakout.
In ascending triangle pattern, the buying force is robust, which pushes the price up. A trader entering the market would put a tight stop-loss at the lower point of the immediate swing to mitigate downward risk.
A downward sloping triangle indicates that selling forces are more potent and there are more sellers than buyers, which would push the price low. To take a position, traders would decide the profit level by measuring the vertical distance between the two trendlines at the beginning of the triangle.
Key Points To Remember In Triangle Continuation Pattern
– Always be mindful of the direction of the trend before the triangle pattern occurs
– Triangle failure is a trend reversal pattern, often accompanied by a top pattern like head and shoulder, Morning Star, or Evening Star before the reversal
– If you are a new trader, don’t take a position unless you receive a confirmation on the direction of the breakout
The bottom line
Triangle continuation patterns are commonplace and appear in any timeframe for any asset chart. Studying triangle patterns help you identify where a trade lies. In most cases, traders will trade in the direction of the prevailing trend as the triangle are pretty convincing continuation patterns. But there are also times when the price actually breaks out in the opposite direction. With time and experience, you’ll gradually learn to predict market momentum using triangle continuation patterns.