Triangle

From Traderpedia

A triangle is a common technical chart pattern found in liquid markets.

Contents

[edit] Types of triangle

There are three types of triangles:

  • symmetrical triangles
  • ascending triangles
  • descending triangles

[edit] Symmetrical triangles

Symmetrical triangles are formed by rallies and sell-offs, each smaller than the last. As opposed to the rectangle where both support and resistance run parallel to the x-axis, the symmetrical triangle is marked by sloping support and resistance.

The support line is upward sloping while the resistance line is downward sloping. The lines converge towards each other over time.

Imagine this as a coiled spring, getting tighter and tighter as time goes along. As time moves on and the price range narrows, an event is in the offing. What the event is we can't be certain. It will usually be a breakout and continuation of the prior trend. But it could also be a reversal. One thing which is close to certain is most of the time the move will be explosive. Just as would be the thrust from the coiled spring once it was let loose.

[edit] Ascending triangles

Ascending and descending triangles are a hybrid of the rectangle and symmetrical triangle. In the ascending variety the resistance line is parallel to the x-axis while the support line is upward sloping.

The resistance line represents persistent selling at a set price level. The flat top shows how any potential price advance is rebuffed any time it approaches. Meanwhile, buyers are willing to consistently up the price they will pay as prices pullback.

The ascending triangle will typically break out to the upside as the seller(s) finishes or as buyers overcome the seller(s), or a combination of both.

[edit] Descending triangles

Descending triangles are the mirror image of their ascending cousins. Here one can find a flat bottom support line with a down sloping resistance line.

The support line represents persistent buying at a set price level. The flat bottom shows how any potential price decline is stopped any time it approaches. Meanwhile, sellers are willing to consistently accept less and less as prices rally.

The descending triangle will typically break out to the downside as the buyer(s) finishes or as sellers overcome the buyer(s), or a combination of both.

[edit] Measurement of the move

Just as with rectangles, two methods can be used:

  • minimum price target: depth of the congestion
  • maximum price target: length of prior move

[edit] Depth of congestion

Measure the "mouth" (i.e the wide end) of the triangle and add this on to the breakout level to find an initial price target. So if the mouth was 10 points and a breakout down occured at 100, then you would expect the initial target to be 90.

[edit] Length of prior move

Here the advance or decline from the previous breakout of congestion to current triangle is measured and added on to the next breakout point to find a longer term target. In this instance the triangle represents the centre of a measured move.

e.g A stock congests between 95 and 100 for a few days. It then breaks out and trends up to 130 where an ascending triangle forms, the mouth being between 125 and 135. The price eventually breaks out upwards from the flat triangle top at 135. The longer term target is then (125-100)+135 = 160.

[edit] Trading strategies

  1. Buying a pullback near support in the case of the ascending triangle, or selling short a rally to resistance in a descending triangle, provides a very low risk entry with potentially high reward. Indeed, with such a high reward to risk ratio one can be right only 25% of the time and still experience tremendous returns with these patterns.

[edit] Related T2W resources

Hunting for triangles