Charts Patterns

Explanation of 3 Types of Triangle Chart patterns

triangle

Ascending Triangle (Continuation Pattern)

Ascending and descending triangles are also referred to as “right-angle” triangles.

Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.

1

Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months. If a triangle pattern does take longer than three months to complete,the formation will take on major trend significance.

2

What does an ascending triangle look like?

Converging trendlines of support and resistance give all three patterns their distinctive shape. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,” located at the right of the chart. The “base” of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

An ascending triangle – the “flat-top” triangle – also shows two converging trendlines. In this case, however, the lower trendline is rising and the upper trendline is horizontal. This pattern occurs because the lows are moving increasingly higher but the highs are maintaining a constant price level.

What are the details that I should pay attention to in an ascending triangle pattern?

  1. Occurrence of a Breakout – Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule, as explained by Murphy, is that price breakout clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle. To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution.
  2. Price Action – With its “flat-topped” shape, the ascending triangle indicates that buyers are more aggressive than sellers. The ascending triangle forms because of a supply of shares available at a fixed price. When the supply depletes, the shares quickly breakout from the flat-topped trendline and move higher.
  3. Measuring the Triangle – To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.

To calculate the minimum price objective, calculate the “height” of the formation at its widest part – the “base” of the triangle. The height is determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the “apex” of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs, or subtract it from the apex price if the triangle experiences a downside breakout.

  1. Duration of the Triangle – As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.
  2. Forecasting Implications – The ascending triangle is considered to be bullish. Typically, that breakout should be accompanied by a noticeable surge in volume.
  3. Shape of Ascending Triangle – Prices should rise to hit the upper trendline at least twice (two highs), then fall away. Prices should fall to the lower trendline at least twice (two lows), then rise. The horizontal top trendline need not be completely horizontal but it often is and, in any event, it should be close to horizontal.
  4. Volume – Murphy advises that in the ascending triangle, volume tends to be slightly higher on bounces and lighter on dips.
  5. Premature or False Breakouts – Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout is a valid one. Typically, a false move corrects itself within a week or so. The pattern immediately will be suspicious without an accompanying high volume breakout. If there’s no pick up in volume around the breakout, investors should be wary.

Ascending triangle is rally to a new high followed by a pull back to an intermediate support level, a second rally to test the first peak followed by a second decline to a level higher than the intermediate term support level and finally a rally to fresh new highs on strong volume.

The technical target is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

  • Ascending triangles are among the most reliable of all technical patterns because both supply and demand are easily defined.
  • The defining characteristic of ascending triangles is the pattern of rising lows and a series of equal highs. This combination of points can be connected to form a right angle triangle. If a stock violates any part of the triangle during its formation the pattern it should be considered void and trading positions should be abandoned.
  • Triangles are about indecision and as such volume should slow noticeably as the pattern is being constructed. It is most important that volume surge as the stock rallies through the reaction high. This tells the technical trader that supply has been absorbed, short covering is rampant and the next leg of the bull phase is about to begin.
  • Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason the pattern becomes invalid.

This pattern typically occur after a stock has had a strong move higher due to a positive fundamental development. Investors come to believe that much higher stock prices are justified given the improved fundamental outlook but a large portion of investors that were smart enough to have bought the stock at much lower prices disagree. These “smart money” investors consider the extreme optimism as little more than an opportunity to liquidate positions. Using fundamental metrics, they set a price to sell their large blocks of stock and wait. In effect, they are beginning a distribution process based on their interpretation of fair value. The first step in the distribution process occurs after one particularly bullish fundamental development. The stock surges to a new high and Wall Street analysts begin pounding the table with new “buy” recommendations.

The increased volume is a perfect opportunity for the smart money to liquidate positions. They begin selling and the rally is stopped in its tracks creating a small top (top #1). As buyers realize that there is plenty of supply at this level prices begin to falter and in short order the stock trades back to a previous intermediate term support level. Because this low is the reaction to the previous rally to new highs, it is often called the reaction low. In this very limited sense, ascending triangles are very much like double and triple tops — rising demand meets entrenched supply. In fact, because the fundamental news is so strong Wall Street analysts dismiss the weakness as simple profit taking and a new rally soon begins.

On strong volume the stock surges toward the recent high where it is once again rebuffed by aggressive sellers (top #2). It is at this point that speculators recognize a trend and they begin adding new short positions just beneath the recent high. This added selling pressure should push the stock significantly lower but bullish enthusiasm is rampant. The stock does move lower but the pull back is subdued, in fact, the stock does not reach the reaction low set in the aftermath of the first move to new highs.

Days later another positive development occurs and the stock begins moving toward the recent high on very strong volume. Speculators step-up and add to their short positions but the supply of stock from smart money investors is being satiated. It soon becomes clear that buyers are going to win this battle because sellers are running out of stock to sell. As the stock pierces what had been strong resistance a strange dynamic occurs, those traders that had been selling the stock short at the recent high are motivated to cover short positions to cut losses — thereby creating increased demand for the stock at a time when supply has been severely curtailed. Against this backdrop ongoing bullish enthusiasm leads to a spectacular price breakout on strong volume. Very soon after the breakout several fundamental analysts make positive comments, aggravating the imbalance between supply and demand. Weeks later the stock surges to a substantial new high. In this rare instance smart money investors are trumped by ongoing bullish fervor and the level that had been resistance becomes important support.

Descending Triangle (Continuation Pattern)

Ascending and descending triangles are also referred to as “right-angle” triangles.

Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.

3

Descending triangles are generally considered bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months.

4

What does a descending triangle look like?

Converging trendlines of support and resistance gives this pattern its distinctive shape. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

A descending triangle, like the other two triangles, features two converging trendlines. In this “flat-bottom” triangle, the bottom trendline is horizontal and the top trendline slopes downward. The pattern illustrates lows occurring at a constant price level, with highs moving constantly lower.

What are the details that I should pay attention to in a descending triangle pattern?

  1. Occurrence of a Breakout – Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule is that prices should break out -and clearly penetrate one of the trendlines – somewhere between threequarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle. To take the measurement, begin by drawing the two converging trendlines.

Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution. Typically if prices don’t breakout of the trendlines before that point, the triangle “begins to lose its potency” and prices will simply drift out beyond the apex with no surge in either direction.

  1. Price Action – With its “flat-bottomed” shape, the descending triangle indicates that sellers are more aggressive than buyers. The pattern typically emerges when buyers feel that the stock is overvalued and decide that the fair value is at a specific lower level. These buyers are prepared to purchase the stock if it hits that specific price level. The floor does not hold because demand wanes – possibly buyers have run out of money or interest in the stock. Once the downside breakout occurs, the stock price continues to fall.
  2. Measuring the Triangle – To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.

To calculate the minimum price objective, calculate the “height” of the formation at its widest part – the “base” of the triangle. The height is equally determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the “apex” of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

  1. Duration of the Triangle – As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.
  2. Forecasting Implications – The descending triangle is considered to be bearish. Bulkowski, however, warns that only 55% of developing descending triangles actually prove to be bearish. However, if investors wait for a valid breakout, then the success rate increases to 96%. Statistics compiled by Bulkowski show that descending triangles are less likely to hit their target prices than ascending ones. According to Edwards and Magee, volume confirmation is more important for ascending triangles than descending ones.
  3. Shape of Descending Triangle – Prices should rise to hit the upper trendline at least twice (two highs), then fall away. Prices should fall to the lower trendline at least twice (two lows), then rise. The horizontal bottom trendline need not be completely horizontal but it often is and, in any event, it should be close to horizontal.
  4. Volume – The descending triangle, volume tends to be slightly higher on dips and lighter on bounces.11
  5. Premature or False Breakouts – Triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

Descending Triangle is a decline to a new low on news followed by a kick back rally to an intermediate resistance level, a second decline to test the recent low followed by a second rally toward but not through intermediate resistance and finally a

decline to fresh new lows on strong volume.

The technical target for a descending triangle is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

  • Descending triangles are among the most reliable of all technical patterns because both supply and demand are easily defined.
  • The defining characteristic of descending right angle triangles is the pattern of declining highs and a series of equal lows. This combination of points can be connected to form a right angle triangle. If a stock violates any part of the triangle during its formation the pattern it should be considered void and trading positions should be abandoned.
  • Triangles are about indecision and as such volume should slow noticeably as the pattern is being constructed. It is most important that volume surge as the stock declines through the reaction low. This tells the technical trader that demand has been absorbed and the next leg of the bear phase is about to begin.
  • Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Descending Triangle is a mirror image of the Ascending Triangle. Like the ascending triangle, the pattern consists of a right angle triangle formation that follows a lengthy trending period. In the case of the descending triangle, the pattern takes shape after a period in which the stock in question has fallen from favor. This fall from grace may be the result of an earnings warning, product delay, lawsuit or negative guidance from management but it is fairly certain that the root of the price weakness is poorer fundamentals.

For weeks the stock trends lower with no bottom in sight. Wall Street analysts become extremely bearish and the stock looks like a lost cause but as a fresh new low is created, buyers suddenly emerge. In most cases this initial buying will come from serious long term investors (smart money) that feel the stock is reasonably priced. These investors have strong hands and all things being equal, they will hold the stock but they are not willing to pay prices in excess of what they feel to be fair value. In short, they look at the position as a work in progress, since the near term fundamental outlook is poor they see no need to “chase” the stock higher.

This initial round of buying by longer-term investors creates a short term bottom (bottom #1). As days pass some professional traders start to realize that there are strong bids for the stock at bottom#1 and the technical and emotional selling that had plagued the stock subsides. Slowly the stock begins to move higher. Although this advance may be aided by positive Wall Street analyst comments or more favorable news flows, volume remains exceptionally light. The stock continues to move higher until there is another negative fundamental development.

At that point sellers return and a reaction high is established. As we will see, this point is vital in the classification of this pattern. The continued negative fundamental news and poor sentiment for the stock lead to more aggressive selling and once again the stock drifts back to the bottom#1 level. Given the negative sentiment a decline through that level seems assured but longer-term buyers renew their efforts, volume increases and the stock holds the most recent lows, establishing bottom#2. With two solid bottoms (support) now in place a new group of buyers enter the picture.

Sensing that the buying is entrenched speculators begin to buy new positions in anticipation of a big move higher — the only problem is the longer-term buyers are not willing to chase the stock. As the price rallies, volume slows significantly, in fact, so slow is volume that the stock fails to move beyond the reaction high. Buyers relent and price begins to falter. Within a few days the stock is trading back near the level of bottom #1 and #2. Speculators begin adding new long positions in anticipation of a rally but the selling continues. Just as longer-term buyers are getting ready to buy a new negative fundamental development occurs and the stock opens dramatically lower, falling well below the levels of bottom #1 and #2.

This breakout leads speculators to panic and sell existing long positions for a loss. Longer-term investors are also forced to rethink their strategy in light of the news and some liquidation begins creating a huge imbalance between supply and demand. A new leg lower unfolds. Weeks later the stock trades significantly lower.

Symmetrical Triangle (Continuation Pattern)

Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.

5

Symmetrical triangles are generally considered neutral. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months.

6

What does a symmetrical triangle look like?

Converging trendlines of support and resistance gives the triangle pattern its distinctive shape. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex,” located at the right of the chart. The “base” of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

Why is the symmetrical triangle pattern important?

A symmetrical triangle pattern is relatively easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To achieve the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle.

Triangle patterns are usually susceptible to definite and dependable analysis, with the proviso that the investor must wait for a reliable, as opposed to a premature, breakout.

Is volume important in a symmetrical triangle pattern?

Volume is an important factor to consider when determining whether a formation is a true triangle. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about whether the pattern is a true triangle.

What are the details that I should pay attention to in a symmetrical triangle pattern?

  1. Occurrence of a Breakout – Technical analysts pay close attention to how long the triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle.

To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution.

  1. Price Action – Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. The symmetrical triangle is generally a consolidation pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that because the breakout direction could go either way that they wait until the breakout occurs before investing in or selling the stock.

3.Measuring the Triangle – To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.

To calculate the minimum price objective, calculate the “height” of the formation at its widest part – the “base” of the triangle. The height is equal determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the “apex” of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

  1. Forecasting Implications – Once breakout occurs, the symmetrical triangle tends to be a reliable pattern.
  2. Shape of Symmetrical Triangle – The pattern should display two highs and two lows, all touching the trendline – a minimum of four reversal points is necessary to draw the two converging trendlines.
  3. Volume – Investors should see volume decreasing as the pattern progresses toward the apex of the triangle. At breakout, however, there should be a noticeable increase in volume.
  4. Premature or False Breakouts – Triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

Symmetrical triangle is a rally to a relative new high, a pullback to an intermediate term support level, a second rally that does not exceed the recent high, a second decline that falls short of the intermediate term support level followed by a

breakout on strong volume above the trend lines created by joining the new high and the secondary high.

Technical targets for symmetrical triangles are derived by adding the largest vertical height of the triangle to the ultimate breakout level.

  • Symmetrical triangles are about growing consensus among traders so a breakout from the triangle means that one group of investors, (bulls or bears) have been forced to abandon everything they believed about price. This sudden imbalance between supply and demand always leads to a violent move in price.
  • Generally, most issues will record a breakout (either higher or lower) about 2/3 through the pattern. If a stock moved all the way to the apex of the triangle the initial breakout is almost always false and should be avoided.
  • Because supply and demand are in equilibrium within the triangle, volume should slow dramatically. Once a breakout has occurred, volume MUST increase significantly.
  • Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason the pattern becomes invalid.

Most consolidation patterns are about indecision — traders are uncertain about the near term direction of the stock so they do nothing. Symmetrical triangles are different because when a stock falls into one of these patterns, traders actually behave as though they have reached a consensus regarding price – there is a uniform narrowing of price over time.

Symmetrical triangles usually develop after a stock has had a spectacular move. After reaching a relative new high price momentum may begin to fade modestly and the stock works lower. Because the fundamental news is so strong, Wall Street analysts will often dismiss this weakness as mere profit taking following a lengthy advance. The stock slips back to an intermediate term support level and price stabilizes.

At this point it is common for the stock to begin moving higher on a positive fundamental development. Perhaps the firm has raised guidance, announced a stock split or unveiled a new product but price slowly begins to move higher. There is one problem, volume is noticeably lighter than previous rallies. The price rally continues but falls short of the recent new high.

This secondary high will be an important point later in the formation of the pattern. After several days of strength, momentum once again fades and price begins to falter. Slowly the stock moves lower on no specific news and extremely light volume. Sensing that sellers may not have an appetite to continue selling buyers reappear and the stock stops short of the intermediate term support level. This secondary low completes the bottom parameter of a uniform or symmetrical triangle.

Over time the stock begins to trade in an increasingly narrow range characterized by a series of lower highs and higher lows. As time passes traders grow to believe that the current stock price accurately reflects the true value of the stock. Volatility and volume slow dramatically as the stock approaches the apex of the triangle. Then, abruptly there is a fundamental development that leads to a dramatic upside breakout.

Volume swells and Wall Street analysts begin making new “buy” recommendations and raising their price targets. As prices moves beyond the upper parameter created by joining the recent new high and secondary high some investors that had felt the stock was fairly priced at lower levels begin selling but their shares are quickly absorbed by buyers. In fact, the demand for the stock becomes so intense that price very quickly surges beyond the recent new high. Weeks later the stock moves significantly higher.

About the author

David Richard

Add Comment

Click here to post a comment

Your email address will not be published. Required fields are marked *


Topics

forexing24-ad-1

forexing24-ad-2

  • analystfx-small.jpg
  • analystfx-small.jpg
  • medium.jpg
  • medium.jpg
  • medium.jpg
  • medium.jpg

Recommended Forex Broker

  • banner-300x250-gif-animation-2.gif