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What is a triangle pattern?
What is a triangle pattern?
There are actually three main triangle patterns, which, when interpreted correctly, give traders information about current conditions, future conditions, and volatility. The triangle patterns are symmetrical triangles, ascending triangles, and descending triangles, and each has different applications and implications for trading. Triangles are generally considered continuation patterns, although there are situations in which a symmetrical triangle can also mark a trend reversal. All triangle patterns have at least two highs and two lows that, when connected and extended, form a triangle shape.
In a symmetrical triangle, the stock’s up and down price movements are confined to an increasingly narrowing range. Although you can technically draw a triangle with as few as four price swings, most traders wait to see at least three swings up or down to draw the trendline.
With an ascending triangle, strength from buyers keeps resistance at essentially the same level during the advance, but each decline is slightly lower, angling the line of support upward to form the apex of the triangle. The downside strength implies an impending upside breakout.
In a descending triangle, selling strength draws a constant line of support during each successive decline, while each advance reaches a slightly lower high. This shape suggests a downside breakout. You will usually see a decline in volume as the triangle forms with a corresponding surge in volume once a breakout is identified. If you’re trading a breakout strategy, you can use it with all three triangle patterns. In this strategy, a buy signal occurs when the price moves above the resistance trendline in the triangle, and a sell signal occurs when it declines below the support trendline. Each trade is backed with a stop loss order set just above or below the most recent swing, depending on whether you are long or short. The idea is to capture profit from a breakout, but it’s a good idea to set a profit target so you have a defined exit point on a profitable trade. Another triangle trading strategy is to anticipate the direction of the breakout and enter trades while the price is still inside the pattern. In other words, if you see an ascending triangle pattern forming, you can buy at a better price at the level of support within the triangle pattern, setting a stop at a price just below the triangle at the time of entry. That keeps the trade risk small relative to the potential profit if the breakout occurs as predicted. This strategy only works, however, after the price has touched resistance or support three times. The first two touch points are necessary to draw the triangle; the third sets the price to enter the trade. The one major drawback to trading triangles is the potential for a false breakout. This happens when the price moves out of the triangle, but instead of continuing in either the upward or downward direction, it reverses, and may even break out again on the other side of the triangle. You can sometimes make excellent trades jumping into a false breakout, but again, you should always mitigate risk with a stop. Not all stocks will develop triangle patterns, so you should have other patterns and strategies in your arsenal.