In financial trading, triangle formations are one of the more reliable signals on a chart, so it’s always nice to have one on the go. And the more practice you get, the better you’ll get at picking out these shapes on your everyday charts.
Today, we’ll take a look at how to spot different triangles on charts – and how to profit from them.
How to recognise triangle formations in financial trading
There are three basic types of triangle to look out for:
In a symmetrical triangle, the upper and lower trendlines converge at roughly the same angle.
In an ascending triangle, the upper trendline is horizontal and the lower trendline is rising with higher lows.
In a descending triangle, the lower trendline is horizontal and the upper trendline is descending with lower highs.
In order to qualify as a triangle, it needs a minimum of four points where the price has tested the trend lines.
What triangles tell us
So, lets say that you’ve spotted one of these shapes on a chart – what does it mean?
Triangles are, in simplest terms, consolidation patterns – where the price is taking a breather. Whether that price then continues or reverses will depend on a lot of factors, but the shape of the triangle can give a clue – plus the all-important break-out from that consolidation pattern.
A symmetrical triangle usually implies a period of consolidation before the prevailing trend is resumed.
An ascending triangle suggests that there is a level of resistance or sellers at a certain price point, and that buyers are continuing to purchase at higher and higher levels after each downswing. This is bullish behaviour, and once the resistance is lifted, the price will be expected to move upwards with some force.
A descending triangle is the opposite of an ascending triangle, and has a bearish bias in the same way that the ascending triangle has a bullish bias. In this case, we have a support level, with sellers becoming increasingly aggressive on each up-swing.
That’s the basic wisdom on triangles, but next we have to wait for the breakout…
The break
The triangle pattern is not complete until we have the breakout. We should be looking for this in the direction of the major trend for a symmetrical triangle; to the upside for an ascending triangle; and to the downside for a descending triangle.
In this example, you can see the symmetrical triangle as a consolidation pattern in the uptrend. Once the triangle is broken to the up-side, we see a strong bullish price move.
Now, a word of warning about breaks like the one above. One rule that many traders apply to triangles is that the break out should occur somewhere between three-quarters and two thirds of the width of your triangle. The closer you get to the apex of the triangle, the stronger the likelihood of a false breakout.
This rule would mean that the triangle formation shown above is no use to us.
It is very common that after the breakout occurs, we’ll see a pull back to the line that we’ve just broken through, before the trend continues. In the example below, you can see the price break well below the resistance level that has just been breached.
You need to be aware of this tendency when placing your stop losses. Many traders will wait for the pullback to place their trades on the second breakout.
Taking profits
The beauty of triangles is that they often indicate a strong move in one direction or the other, giving the trader an opportunity to collect a healthy number of points, while keeping a relatively tight stop.
How many points or pips should we be going for?
The perceived wisdom is this: the breakout move that we’re looking to ride should be equal to the distance from the highest peak to the lowest trough of the triangle pattern.
Some traders will measure this move from the break-out price, but I prefer to take it from the apex of the triangle, like this …
How my triangle fared this week
So, what happened on that triangle on the EUR/USD chart this week?
Well, there are some complicating factors in this trade. The first is the major long-term resistance just above our triangle.
In these circumstances, it would be a mistake to get greedy and look for a full move the size of the measure rule.
The second factor is that we didn’t breach the triangle until we were in the “danger area” close to the apex, so we have to be extra cautious of false breakouts (remember, we’re looking for a continuation of the upward trend).
And the third factor to bear in mind is that the trade opens and shoots up on Thursday morning, but stagnates in that lull that hits the markets on the day before a non-farm payroll release. We’re left with the decision of whether to take profits now, or tough it out on a non-farm payroll day. (I’m certainly one for taking the profits ahead of a day like this!)
