Trading Using Triangle Chart Patterns
As a trader, you’ve got access to many trading tools and resources. Triangle patterns rank among the most reliable options available to traders who are interested in technical analysis. This bilateral pattern can go in 2 directions after a break-out.
Trends can reverse, or trends can continue. Of the 3 triangles that are available, prices can Consolidate, Ascend, or Descend. As price approaches the convergence of trend lines, there is a much greater probability of a break-out. The triangle pattern is deemed complete the moment a price breaks out of it.
This can be to the upside or the downside. Ascending, Descending, and Symmetrical triangle patterns all make use of support levels, resistance levels, and break-out levels. When evaluating triangle pricing with specific assets such as a company share or a forex currency pair, it's important to look for support and resistance levels and when these two levels converge.
For example,when the price closes above the resistance line, it is time to buy the underlying instrument. When the price closes below the support line, it is time to sell the underlying instrument.
With triangle continuation patterns, you will notice that a period of resting follows significant price movements. When price consolidation takes place, the pattern is formed with higher lows and lower highs . This is how the shape of the triangle is formed. An interesting pattern develops when support and resistance lines begin to converge.
Pricing typically moves in the general direction of the trend prior to the convergence. If the prices were falling for the underlying asset, they usually continue falling. If the prices were rising, they usually continue rising.
When to Buy or Sell Using Triangle Chart Patterns?
Examine any triangle continuation pattern, and you will invariably see support and resistance lines. If the resistance line is breached with upward momentum, this is typically considered a buy signal. The strength of the signal when trading triangle patterns is determined by the level of bullishness, also known as an upward momentum.
Sell signals usually occur when the underlying support line is breached to the downside. The strength of the sell signal is determined by the level of bearishness driving that price movement. The stronger the downward momentum, the stronger the sell signal will be.
There are many other variants of triangle trading patterns to consider. For example, ascending and descending triangles are common. Let's assume you’re trading gold futures on the ASX, or at your favourite online broker. The things to look for in ascending triangles are higher lows or higher highs. Both would represent positive momentum in trading activity.
As a rule, you would tend to buy the underlying asset when the price closes above the resistance line, or the breakout. With descending triangles, sell signals are present when the support level is breached to the downside. This is perceived as a bearish signal. Look for a change in the trend, and in both cases remember: The trend is your friend!
How to Identify Different Types of Triangle Trading Patterns?
Triangle trading patterns get their name from a tight trading range over time. The 3 basic types of triangle patterns include the symmetrical triangle continuation pattern, the ascending triangle continuation pattern, and the descending triangle continuation pattern.
The symmetrical triangle continuation pattern is neither positive nor negative. It is balanced with pricing able to move up or down. In other words, as the symmetrical pattern continues, it can trend bullish or bearish.
The ascending triangle continuation pattern trends in an upward fashion; this much is evident from the price movements over time.
The descending triangle continuation pattern features pricing moving in a negative direction.
The easiest way to identify different types of pricing patterns is to look at the apex. The apex refers to the point of convergence between support and resistance levels. If the apex is pointing downwards, and prices are moving lower from left to right, it is a descending trading triangle. If the apex is pointing upwards, and prices are moving higher from left to right, it is an ascending triangle trading pattern.
The key lines to look for are support and resistance lines. A support line is one that supports the price and is always the bottom line in a triangle. A resistance line refers to a price ceiling that the underlying asset struggles to breach. While not carved in stone, an asset usually trades within the boundaries provided by these two lines.
It is interesting to understand how triangle patterns develop, to begin with. Any security (financial instrument) will undergo a series of price movements during a timeframe. Asset prices will rise, and they will fall. When an asset is trending bullish (prices are rising), there may come a time when a reversal or correction takes place in the market. This results when the trend loses its steam and reverses.
Already, the first point of the triangle pattern has been formed. Prices will continue to whipsaw, encountering opposing pressures from support and resistance levels.
These reverses become increasingly rapid, with limited price fluctuations taking place, resulting in a convergence of support and resistance lines leading to an apex. The direction of price movement at this juncture depends upon the current momentum – bullish or bearish – in the market. Upside breakouts are associated with ascending triangles, and downside breakouts are associated with descending triangles.
Unique Triangle Trading Strategies
A myriad of possibilities exists for trading triangle chart patterns with day trading strategies. A unique strategy known as an Anticipation Strategy exists when traders predict (assume) that a particular trading regimen will hold its line, or a breakup will occur in a specific direction – up or down.
The trader would then buy the security near the support level, rather than waiting for the breakout to occur. This has the added advantage of being able to ride the wave as prices rise.
Of course, if you think that prices will reverse in the other direction, you can trade on the resistance level before the apex and breakout are reached. This allows you to short the asset and ride the wave of the sharp price decline that will follow. By shorting near the top of the trading triangle, stronger gains stand to be had.
With symmetrical triangles, it's tough to call bullish or bearish price breakouts. These triangles tend to consolidate and trade in a much tighter range, driving the support level higher and the resistance level lower. These triangles are associated with ascending lower trendlines and descending upper trendlines. The perfect trading strategy for a symmetrical triangle depends upon the assets that are being traded.
For example, if you are trading the AUD/USD currency pair, and the underlying asset has revealed a symmetrical trading triangle for some time, you are advised to consider economic indicators which may have a bearing on price movements. For example, employment numbers, inflation data, interest rates, non-farm payrolls, geopolitical considerations such as trade tensions, market movements, and other elements can adversely affect one currency relative to another.
HOT TIP: If the Reserve Bank of Australia decides to raise interest rates, this will invariably strengthen the AUD relative to the USD and support a positive breakout on a symmetrical triangle!