What does a symmetrical triangle pattern mean?
A symmetrical triangle chart pattern primarily symbolizes a volatility contraction in the market. In other words, the market’s volatility is slowly shrinking and may soon breakout or breakdown. This pattern is observed when a share’s price is consolidating in a manner that generates two converging trend lines with closely aligned slopes. This chart pattern itself shows an ongoing period of share price consolidation before it is forced to breakdown or breakout. If the lower trendline experiences a breakdown, this marks the beginning of a new bearish trend. Alternatively, if the upper trendline experiences a breakout, this implies the beginning of a new bullish movement.
What does a symmetrical triangle pattern look like?
A chart pattern that features two trend lines converging such that they connect in a series of peaks and troughs is a symmetrical triangle pattern or wedge chart pattern. Both trend lines should converge at a roughly equivalent slope, hence giving the shape of a triangle. If both the trend lines converge at an unequal slope, then they are no longer symmetrical. These lines are referred to as an ascending or descending triangle respectively.
The symmetrical triangle pattern is visually different from a descending or ascending triangle pattern as both of the former’s lower and upper trend lines slope towards a center point. Contrastingly, a horizontal upper trendline is seen in ascending triangles which predict a potentially higher breakout. With a descending triangle, one observes a rather horizontal lower trendline. This predicts a potentially lower breakout. Hence, the lines have to be roughly equal in their convergence slope to be characterized as a symmetrical triangle chart pattern.
Many trading experts admit that one way to identify a symmetrical triangle is to see the duration of the trendline. This is because whether or not the trend has been observed for days or months can confirm whether the pattern is a symmetrical triangle pattern or just a temporary flat or pennant. In general, if the pattern is observed over months it is most likely a symmetrical triangle. If it is just a few weeks old, then it is probably a pennant or a flag.
How to infer the breakout price from a symmetrical triangle pattern?
Traders use the distance from the low and high of the earliest section of the pattern as a means to estimate the breakdown or breakout price point. For instance, let’s say that the symmetrical triangle pattern begins at a low of ₹10.00 and continues to move upwards to ₹15.00 before this range begins to narrow. A breakout as seen at ₹12 would imply a target price of ₹17. The underlying formula is ₹15 — ₹10= ₹5 + ₹12 = ₹17.
Estimating a breakout point also helps in knowing where to place one’s stop loss. Normally, in a symmetrical triangle chart pattern, the stop loss is placed right before the breakout point. For instance, assuming the aforementioned share breaks out on high volume from ₹12.00, traders will usually place their stop-loss right below ₹12.00 to minimize any potential losses. It is also crucial to note that, as with most forms of technical analysis, symmetrical triangle trading works best when one analyses other technical indicators and patterns as well.
Tips to Trade Using a Symmetrical Triangle Pattern
Symmetrical triangle technical analysis works best in conjunction with different chart pattern analyses. Using symmetrical triangles patterns, traders typically are looking for a high volume movement in a share price so they can confirm its breakout. Other indicators can help estimate the duration of that breakout. For example, RSI or the ‘relative strength index’ is usually used in conjunction with symmetrical triangle technical analysis to estimate when a security has become overbought after its breakout.
Traders also use moving averages in conjunction with a symmetrical triangle chart pattern to trail their stop loss. Besides using a trailing stop loss technique, traders often use a price projection technique when using a technical indicator like a symmetrical triangle. Here’s how price projection works. First, calculate the distance between the lowest point and highest point of the symmetrical triangle pattern. This is its width. ‘Copy-paste’ this width at the breakout point. Now you can exit your trade at a price projection level.
– A symmetrical triangle chart pattern occurs when the share price consolidates in a manner that generates two converging trend lines with roughly equal slopes.
– Both breakdown, as well as breakout targets for a symmetrical triangle, are equal to the distance between the initial low and initial high applied to these respective points.
– Traders use symmetrical triangles in conjunction with other types of technical analysis tools to help confirm their estimates about potential breakout points.