Technical Analysis

Hunting for Triangles

Trend analysis is a complex process that goes beyond trend lines, channel lines and retracements.   An important aspect of this type of analysis is the identification of patterns that reinforce trends and of formations that signal the reversal of trends. 

Chart formations that show the extension of trends are called continuation patterns. They consist of pauses within trends and they are generated by traders who realize some or all of their profit typically ahead of significant releases of economic data or strong technical level. These behavioral patterns translate into chart formations and tend to look like neutral moves.  However, they can either slope against the original trend or, more rarely, slope in the direction of the trend. The consolidations are fairly short ? but not always.

The most important continuation patterns are: flags, pennants, triangles and wedges.  Let?s focus on triangles.

Differences between a Pennant and a Triangle

A pennant is trend continuation formation which consists of a trend, also known as the pennant pole, a consolidation formation, which resembles a triangle, and of a breakout in the same direction of the original trend (see Figure 1).  Back testing shows that the breakout is similar in size to the amplitude of the original trend.  While lack of volume continues to haunt FX traders, it is easy to see that volume decreases steadily as the consolidation phase of the pennant is unfolding.  This raises the issue of the direction of the breakout; while a bull pennant is supposed to break upward and a bear pennant to continue downward, the consolidation shows clearly the dwindling trading interest, and this warns of possible fake breakouts.

Figure 1.  Diagram of a pennant.

Triangles can be envisioned simply as pennants with no poles (see Figure 2).  This means that you will have price objectives smaller than the pennants?.

Figure 2.  Diagram of a triangle.

Types of Triangles

There are four types of triangles: symmetrical, ascending, descending and expanding (broadening). The most common, by far, is the symmetrical triangle (see Figure 3).

A symmetrical triangle is bordered by symmetrically converging support and resistance lines. The price target of a triangle can be measured in two ways: by extrapolating the width of the base of the triangle from the breakout point, or by drawing a parallel to the support line in the case of bullish triangle (or to the resistance line for a bearish triangle). These two methods may lead to slightly different price targets.

Figure 3.  Two methods of measuring the price objective for a symmetrical triangle.

Let?s follow the numerical example in Figure 4.  The width of the triangle is the 150 pip-range between 1.2850 and 1.2700.  Once the currency market breaks out at 1.2775, apply the first method and extrapolate 150 pips always from the breakout point; you will have a price target of 1.2925.  If you apply the second method, then the dotted line, which is a parallel to the rising support line, will yield roughly the same target as the first method.

Figure 4.  Numerical example of calculating the price objectives of a triangle.

Figure 5 displays a market example of a symmetrical triangle on the daily dollar/yen chart.  The consolidation period lasted approximately 8 ½ months, so this qualifies is as a medium-term or even longy-term formation.   This is a typical example for this pattern because, unlike flags or pennants, it works best in the medium term or the long term.

Figure 5.  A market example of a symmetrical triangle on the daily dollar/yen chart.

Let?s take another example in which the type of formation unfurling is less clear.  Figure 6 displays a triangle in the euro/dollar weekly chart.  The base of the triangle is marked by the blue line on the left of the chart and measures approximately 1275 pips.  Euro/dollar broke upward from 1.2265; if you extrapolate the 1275-pip distance, you will calculate the objective of the triangle at 1.3540.  This target was reached.  However, is this only a symmetrical triangle or is it only the ?canvas? part of a bullish pennant?  Well, it looks like one, so it?s normal to say that it?s a bullish pennant.  The problem here is that the target of the pennant is so enormous that might exceed normal expectations.  In this case, the length of the pole of the pennant is approximately 2100 pips ? quite a hefty size. Measuring this distance from the breakout point will generate a target for the euro/dollar at 1.4365! To reach such a distant objective, the pair must surpass the standing life-time high in the 1.3666 area and coin an all new record; this is easier said than done.  Consequently, the medium term currency traders are advised to shoot for the initial target, which comes from the triangle, and take profit on some of the long positions.  The profit on the rest of the long position should be taken following the break of a trendline, short-term moving average or parabolic system.  Depending on traders? horizon, entering a short position would probably be a good idea as well.   In this example, liquidating long euro/dollar positions and getting short was certainly the best strategy to follow. 

Figure 6.  A market example of a bullish symmetrical triangle or of a bullish pennant on the weekly euro/dollar chart.

Problem in Reaching the Target of a Triangle

Even the target of a triangle might be too far to be reached.  Traders make a big deal out of the breakout from a triangle.  However, a breakout can be deceptive for the eye and disruptive for traders? pockets.  As the currency is approaching the tip of the triangle, or to be more specific, the area where the slanted support and resistance levels are about to converge, there is no other path to follow but to break out.  A break-out from a triangle doesn?t guarantee that the currency will reach the price objective of a triangle. 

For example, the euro/yen cross formed a triangle on the weekly chart, and the base of this consolidation measures 2100 pips, as the approximate distance between the 141.00 and 120.00 areas.  The target of this triangle, which you can see in Figure 7, as measured from the break out point at 137.00 is seen at around 158.00 yen per euro! This is simply too far!

Figure 7.  An example of triangle where the target is likely too far to be reached in the medium of the long term.

Naturally, in the case of a triangle, the breakout must occur in the same direction as the previous trend to meet the criteria of a continuation formation.  The directional risk here comes from the fact that trading volume will visibly decrease towards the tip of the triangle, reflecting the ambivalence in the market or a temporary balance between the supply and demand.  This milieu increases the odds that a break will occur on either side, rather toward the ?prescribed? direction. An example of a bearish triangle that broke on the wrong side is seen in the weekly chart in euro/sterling in Figure 8.

Figure 8.  A market example of a bearish triangle that broke on the wrong side on the weekly chart in euro/sterling.

Regardless of direction, the breakout must be accompanied by a rise in volume, which, of course remains a challenge for the cash currency traders.

Other Types of Triangles

Beside the more common symmetrical triangles, there several other types of triangles. 

The ascending triangle is bordered by a flat resistance line and a rising support line. There are two types of ascending triangles: bullish and bearish.

Figure 9.  Diagram of a bullish ascending triangle.

As you can see in Figure 9, the bullish ascending triangle extends an uptrend.

The bearish ascending triangle continues a downtrend and is also formed by a flat resistance line and a rising support line (see Figure 10).

Figure 10.  Diagram of typical bearish ascending triangle.

Descending triangles are the mirror image of ascending triangles and are characterized by a flat support line and a declining resistance line. This continuation pattern may be bullish or bearish as well.  Figure 12 shows diagrams of both bullish and bearish ascending triangles. 

Figure 11.  Diagrams of both bullish and bearish ascending triangles.

 The expanding or broadening triangles are unusual patterns.  They consist of a horizontal mirror image of symmetrical triangles, where the tip of the triangle is next to the original trend, rather than its base (see Figure 12). Volume follows the horizontal mirror image switch as well and increases steadily as the chart formation develops. 

Figure 12.  Diagram of the expanding or broadening triangle.

Cornelius Luca is a world–renown author, teacher and authority in foreign exchange who has traded and analyzed currencies since 1983.  He currently is a member of the staff at Global Forex Trading, Division of Global Futures & Forex, Ltd., as one of its analysts who provides commentary on the foreign exchange market. His daily and weekly analysis of the major currencies can be read at GFT's resources section.Luca is a qualified professor of finance who has taught courses at the New York University, Pace University’s Lubin School of Business Graduate Division in New York City and at the New York Institute of Finance’s FT Knowledge. His published works include Trading in the Global Currencies Markets, which was published by Prentice Hall and is a comprehensive analysis of the foreign exchange markets, instruments, players and methods of forecasting.Additional Luca works published by Prentice Hall include Technical Analysis Applications in the Global Currencies Markets, which is an in–depth and unique coverage of currency charting analysis. His most recent book, titled Technical Analysis Applications, was published by McGraw-Hill in 2004.Luca earned a master’s degree in business, concentrating in international business and finance from the New York University’s Leonard Stern Graduate School of Business and a bachelor’s degree in international marketing from the Bernard Baruch College, The City University of New York.

Cornelius Luca is a world–renown author, teacher and authority in foreign exchange who has traded and analyzed currencies since 1983.  He currently ...

SOCRATES

Veteren member
4,966 134
Yes, all very good. However what do you do about these triangles when you find them, because dealing with these formations in textbook mode is a very different proposition to dealing with them in live trading in real time, is that not so ? I ask you because all these ideas have a perverse habit of delivering the result, the opposite of what in textbook parlance is the result expected, to the dismay and disconcerting shock of the trader, I respectfully submit....
 

Pippppin

Well-known member
386 18
Mathematical evidence

For the past 6 years or so I have been researching triangles...in particular seeking mathematical evidence for which way a market is going to move when prices are oscillating within a triangle.

One of the problems with the knowledge lab article is that triangles are usually drawn with hindsight. Figure 8 is interesting. The triangle is described as "bearish". My mathematical analysis would have suggested the exact opposite.

Has anybody else investigated triangles in a more quantitative way?
 

Mr. Charts

Legendary member
7,364 1,181
Yes. Years ago on UK stocks and more recently on an ongoing basis with US stocks intraday.
The results are similar.
The key to a decent success rate is the overall market condition and that of the sector.
Obviously in a running bull or bear market continuation patterns work better than in a ranging one.
However, the key for me on Nasdaq stocks is reading quite different patterns and then level 2 and T&S to confirm or otherwise the likely imminent move; on other stocks, (as well as Nasdaq), it is an understanding on whether and how much volume moves price to indicate possible accumulation or distribution.
In my experience triangles are extremely useful in alerting me to possible moves, BUT NOT necessarily in the direction most people would anticipate.
I have plenty of examples of live screen shots in my image data base.
As Socrates says, live trading is a whole different ball game to spotting triangles in retrospect which then "prove" how well they work.
FWIW, I do not include them in the high probability patterns which actually work in real life.
Richard
 

SOCRATES

Veteren member
4,966 134
Yes, because proficient live trading comes from "complete understanding" and not from what is implied to be other than that, as Mr Charts so aptly explains above.

Proficient live trading comes from having a very complete and comprehensive inventory of tools with which to tackle a great variety of tasks, some easy and some complicated, and occasionally some impossible.

Out of this array of tools the right ones are chosen, like a surgeon would do when carrying out an operation, to tackle the job in hand, or rather, each minute component, but all at the same time, and that, is the main difficulty most people face.

So you see, none of it is that simple, but I am interested to see, what light Cornelius Luca is willing or able to shine upon his statements in order to illuminate them properly for the benefit of the membership.
 

micb1

Newbie
3 0
triangle formations

I not sure if this is the right place to put this

I am new to trading and have been looking a triangle formations

i have been watching exel stock ftse 100 and would like to know if I have drawn this triangle right and also what does it mean?

any advice would be beneficial

thanks

mike
 

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sulong

Active member
249 15
micb1 said:
I not sure if this is the right place to put this

I am new to trading and have been looking a triangle formations

i have been watching exel stock ftse 100 and would like to know if I have drawn this triangle right and also what does it mean?

any advice would be beneficial

thanks

mike
I thought it was odd that this guy spent 1 sentence of that article talking about "what a triangle represents".

A tri. is a form of price consolidation.
A tri that develops with in a trading range (like you have) will have different characteristics than those that develop within a breakout or trending environment.
When studying price pattern's, It's very helpful to note the most recent price action just prior to the formation of the pattern of interest.
 

SOCRATES

Veteren member
4,966 134
patterns357 said:
Chart 11 should be labeled descending. I would encourage you not to bias the reader with a generic outcome.
Correct.
 

wwatson1

Well-known member
341 1
Not a very good example of a triangle pattern I would discard this stock as a possible trade.

If you really must make the trade I suppose you could try going long if there is an upside break of the strong 870 resistance.

But again I would look for a better pattern.
 

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Pippppin

Well-known member
386 18
Here is a beauty...

Time to revive the "hunting for triangles" thread

Have a look at the monthly chart for the US stock Viacom Inc (attached - ticker VIA). Which way is it heading..........?
 

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Denny

Member
52 1
Triangles

My experience with triangles is that they are not always clear cut as to whether they are continuation patterns or reversal, Nor whether bullish or bearish. My feeling is that it is best to wait for the move out of the box before trading. Regarding Viacom I see it has closed outside of the box twice, which indicates that this would be a good one to short at the moment.
When you think about it triangles, pennants and wedges are just congestion zones, which are ever decreasing and are always going to breakout some way or another. This is often confirmed looking at the contraction of the bollinger band which often accompanies it, because they are both showing the same thing.
 

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