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Triangles: Tricky Continuation and Reversal PatternWritten by Brian Tran
Last updated: Tuesday, 02 January 2007Triangles are probably one of the most common patterns seen in price charts. They form during consolidation period and are usually marked by low volume. Common knowledge on trading the triangle is typical: breaking out to upside, a buy or cover shorts, or breaking out to the downside, sell or sell shorts. But trading the triangles can be difficult due to the nature of the consolidation itself. Triangle don’t always have a clear breakout level so it's at times to know where the breakout has begun or where the consolidation is still in effect. Without a doubt, combining volume and price will help increase the chance of identifying the breakout correctly.
There are 3 types of triangles: symmetrical, ascending and descending. According to many traders who are familiar with different types of triangles, they understand that each of the three usually provide hints to the direction where prices may be heading. But anticipating the market direction is a loser's game, the market must confirm itself before committing precious capital into the markets. The three charts above show examples of three types of triangles.
What do triangles tell the trader? This pattern, along with rectangles, can be continuation and a reversal pattern. This is what makes them more difficult to trade than Head-and-Shoulder, double-bottom or double-top, where they are identified as reversal patterns only. But since triangles are abundant, particular in intraday charts, it pays to learn and trade from off these patterns. The frequency of opportunities increases the chances the trader to make more money. The less frequent the trader trades, the less money, the less he’ll make. It's common sense.
Triangles are easy to identify, when the prices sliding up and down narrowing the range between the high and low, normally with volume diminishing the prices approaching apex. Once they are identified and approaching a breakout, caution must be seriously taken. The breakout must accompany high volume to ensure that it's not a false breakout; else it may pierce through only to return to the triangle again. Or prices break out only to stop at the high of the triangle formation for upside breakout (low of the triangle for breakout to the downside), which may become a rectangle pattern. Many traders carelessly trade the breakout only to find it’s still in consolidation and get stopped out of the position over and over, until a real breakout has occurred. By that time, he is too exhausted and afraid to take another trade thinking that it would just be another false breakout.
How does one identify the real breakout and the entry? There are two criteria to consider:
- High volume must be evident on the breakout bar(s). Since there are no volume data to see, the rapid movements of the ticks or the bid/ask are good clues to volume.
- Confirmation is needed to guarantee that the breakout is a real one. Confirmation is when resistance becomes support or support becomes resistance. Say, when prices pierce a trendline to the upside, that trendline was resistance. From above the trendline, prices pull back to near or at the top trendline of the triangle, reverse then continue upward to the direction of the breakout. At that moment, resistance had become support-- that is a confirmation. Many traders also identify this as the first pullback/rally from the breakout, the ideal entry for many experienced traders.
The above chart shows the yellow shaded are with the breakout from the top trendline. After the breakout, it moves back toward the trendline. In the shaded area on the chart below, the prices moved just past the trendline then reversed upward, it was finally confirmed the trendline was resistance is now used as support (bounced off the trendline to head upwards). The long entry is taken when the bar makes a higher than the previous bar's high, riding the change in momentum.
Where are the stops and targets placed? The stop loss is usually placed just below the bottom of the triangle formation shown in the chart below. This stop will avoid any whiplash back into the triangle if a the pullback happens to be deeper than normal, which sometimes occur.
To measure the target, it is the distance from longest vertical side of the triangle. In the chart below is the yellow shaded box high and low of the triangle. Calculate the high from the low.
Use that and measure the distance from the breakout to the above area. The yellow shaded area below shows the distance taken from previous chart and applied from the breakout upwards. That's the measured target.
Putting it all together, the chart below shows all the necessary
ingredients to make a managed high-reward-low-risk trade: entry, stop
loss, and an exit target.
Triangles are great patterns to profit from but they can be tricky if rules are not obeyed. But with patience to let the patterns show the way, a trader can go in the right side of the trade most times.
Any opinions, news, research, analyses, prices, or other information contained on these articles are provided as general market information and does not constitute investment advice. Moving Media GMBH dba: Forexplane.com will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. |
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