The triangle is one of the most common and reliable chart patterns used in technical analysis of the financial markets. This pattern appears frequently on stock charts and provides traders with advanced notice of coming breakouts and trend reversals.
In this comprehensive guide, we will cover everything you need to know about trading triangle patterns, including:
- What are Triangle Chart Patterns and Why are They Important?
- Types of Triangle Patterns
- Symmetrical Triangle
- Ascending Triangle
- Descending Triangle
- How to Identify Valid Triangle Patterns
- Entry and Exit Points
- Price Targets and Measuring Objectives
- Strategies and Tips for Trading Triangles
- Advantages and Drawbacks of Triangles
- Examples and Case Studies
And much more. By the end, you’ll have an in-depth understanding of how to trade triangle chart patterns and use them effectively as part of an overall trading strategy.
What are Triangle Chart Patterns and Why are They Important?
Triangle patterns are named as such because they are characterized by a series of higher highs and lower lows that converge toward an apex over time, creating a triangular shape on the price chart.
These patterns reflect a period of consolidation in a stock before a major breakout or breakdown from the triangle. The converging nature indicates a slowdown in volatility as buyers and sellers reach equilibrium. This dynamic tension situation cannot last forever, so a breakout is inevitable.
Traders watch these patterns with anticipation since the eventual breakout from the triangle tends to be a significant move that establishes the next trending leg. Being able to identify triangles early can provide advanced warning of potential breakouts before they occur.
Understanding triangle patterns is crucial for any technical trader seeking to capitalize on chart-based analysis. These formations provide excellent opportunities to enter into new positions just as a stock is gaining momentum in a new direction.
Let’s explore the most common types of triangle chart patterns.
Types of Triangle Patterns
There are three main types of triangle patterns that you’ll encounter often when analyzing charts:
Symmetrical Triangle
This is the most common version, characterized by converging trendlines with a series of lower highs and higher lows. The symmetrical triangle indicates a battle between supply and demand with neither side dominating.
The pattern contains at least two lower highs and two higher lows. When the triangle apex is reached, a breakout occurs to resolve the consolidation. The symmetrical triangle has no definitive bullish or bearish bias.
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Symmetrical triangle pattern (Investopedia)
Ascending Triangle
This is considered a bullish pattern where resistance is flat but rising troughs indicate buying pressure. The flattening resistance reflects seller hesitation.
An ascending triangle contains at least two reaction highs and two reaction lows. The breakout usually occurs to the upside but can also sometimes fail by breaking down instead.
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Ascending triangle pattern (Investopedia)
Descending Triangle
This is considered a bearish pattern where support is flat but a series of lower highs indicate selling pressure. The flattened support represents buying hesitation.
A descending triangle contains at least two reaction highs and two reaction lows. The expected breakout is to the downside, reflecting the strong bearish sentiment. However, upside breakouts are still possible.
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Descending triangle pattern (Investopedia)
Now that you know the types of triangles and what they signify, let’s go over how to properly identify them on stock charts…
How to Identify Valid Triangle Patterns
Being able to spot authentic triangles early is a skill that develops over time as you gain more experience. Here are some guidelines for identifying quality setups:
- Look for at least 5 reversal points – There needs to be two swing highs and two swing lows to establish a pattern. The more reversals, the higher quality.
- Clear convergence of trendlines – The upper and lower trendlines should converge toward an apex with angles narrowing.
- Volume should contract – As volatility decreases entering the pattern, volume should dry up indicating consolidation.
- Watch the slope of trendlines – For ascending triangles, the lower trendline should be flat. For descending triangles, the upper trendline should be flat.
- Identify breakout or breakdown – There needs to be a valid break of one of the trendlines with increased volume. This signals the end of the pattern.
- Use appropriate timeframes – Triangles need sufficient time to form, so use daily and weekly charts when possible. Intraday and lower timeframes are less reliable.
- Have patience – Quality triangles can take a few weeks or months to play out, so don’t anticipate immediate breakouts. Wait for clear signals.
Follow these guidelines, and you’ll be able to spot authentic triangle setups forming on stock charts. Now let’s discuss how to take advantage of these patterns…
Entry and Exit Points
Triangles provide well-defined entry and exit points that can be used to put on trades with calculated risk management.
Entries
The safest entry point is after the pattern breaks out beyond the upper or lower trendline decisively on increased volume. This confirms the pattern is complete and the new trend emerging.
Traders will often buy the first pullback to the broken trendline after the initial break since this area now acts as support or resistance. Stop losses are placed on the opposite side of the triangle apex.
Exits
Initial profit targets are based on the height of the triangle projected from the breakout point (covered next). Further trail stops to lock in gains if the trend continues.
Set a stop loss on the other side of the entry candle once in the trade. This contains any losses in case the breakout fails. Exit the trade if price closes below the stop loss.
Now that we’ve covered entries and exits, let’s discuss how to set profit targets…
Price Targets and Measuring Objectives
One of the advantages of triangle patterns are the clear price targets that can be defined based on the height of the formation.
To calculate targets:
- Measure the vertical height of the triangle from the highest swing point to the lowest.
- Project this distance from the breakout point in the direction of the breakout.
- The resulting level is the minimum target, but prices can often exceed this target.
For example, if a descending triangle is 20 points tall, then the projected move after an upside breakout is 20 points higher than the breakout level. This provides an objective method for setting profit targets.
Always use other aspects of technical analysis to confirm price movements and modify targets accordingly. The target is just a guide, not an exact science.
Now let’s discuss some trading strategies to use with triangle patterns…
Strategies and Tips for Trading Triangles
When traded properly, triangle patterns can be consistent winners. Here are some key strategies and tips:
- Wait for the breakout – The lowest risk entry point comes after the breakout, so be patient for it to develop.
- Confirm the breakout – Make sure the break is definitive and supported by expanding volume. Don’t chase early.
- Use stop losses -Contain risk by placing stops beyond triangle support/resistance levels.
- Define profit targets – Use the measured move technique covered earlier to set objectives.
- Trade the pullbacks – Look to join pullbacks to the broken trendline for additional opportunities with defined risk.
- Stick with the trend – Let breakout gains run, trailing stops to lock in profits from extended moves.
- Be agile – Adjust biases and targets as price action develops. Be willing to exit early if the breakout stalls.
Follow these strategies, and you’ll be able to execute triangle trades with confidence.
Now let’s discuss the inherent advantages and drawbacks of trading triangle patterns.
Advantages and Drawbacks of Triangles
Triangles have some unique benefits that make them a favorite for short-term traders:
Advantages
- Provide early warning of breakouts
- Easy to identify visually on the chart
- Offer clear areas for entering trades
- Risk can be defined and minimized
- Provide objective price targets
- Work on all timeframes and instruments
Drawbacks
- Require patience to fully form
- Risk being stopped out on false breaks
- Difficult to hold long term due to define nature
- Do not work as well in choppy, low volatility environments
While not perfect, triangles give traders an edge if applied properly with sound risk management. They are a invaluable tool for technical analysts.
Now let’s go through some real-world examples…
Examples and Case Studies
To demonstrate triangles in action, let’s review a few real-world chart examples:
Example 1: Ascending Triangle on the 5-minute chart of XYZ Corp
This ascending triangle formed over 15 periods with a series of higher lows along flat resistance around $25. The breakout was confirmed with expanding volume with a rally up to the measured move target of $28, making for a quick scalping opportunity.
Example 2: Descending Triangle on the 60-minute chart of ABC Inc
This descending triangle took over 3 weeks to form with a series of lower highs below $18 resistance. The eventual breakdown was swift as price plummeted straight through the target of $14 without any pullback, catching many traders off guard who expected support at $16.
Reviewing real chart examples helps internalize how triangles behave in the markets. Look for opportunities to study them across different stocks and timeframes.
Conclusion
Triangle patterns are a key component of any chartist’s toolbox. This guide provides a comprehensive overview of trading triangles, including:
- Rules for identification
- Entry and exit methods
- Target calculations
- Trading tactics
- Advantages and limitations
Now you have the complete knowledge to take advantage of triangles on your own charts.
When identified and traded properly, triangles provide high-confidence setups just before major trending moves emerge. Mastering this skill can significantly boost your trading performance.
So keep reviewing charts to spot triangles forming. It takes practice, but the effort is well worth it. Your next big winner could very well start as a humble triangle pattern.
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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