Triangle Chart Patterns
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General Description
A Triangle pattern is one of the most important technical chart patterns that an investor should pay attention to, and recognizing the pattern promptly can help the investor to determine the entry and exit positions along with stop loss and profit-taking prices. It forms as a price range between high and low becomes less and less gradually, i.e., with lower highs and higher lows. The upper trendline and lower trendline eventually intersect with each other at the endpoint. The trading volume decreases as the price fluctuates within the formation. The appearance of the triangle pattern indicates the long and short sides have entered into a stalemate consolidation phase, they are either watching or fighting fiercely until one side wins. It’s the process of the market is “deciding”, filled with doubts and hesitation. It consists of three types of shapes: Ascending Triangle Pattern, Descending Triangle Pattern, and Symmetrical Pattern.
Ascending Triangle Pattern
An ascending triangle is formed by a horizontal resistance line and an upward sloping line that connects higher lows as shown in the picture above. The sellers are not desperate to sell, but also not so optimistic about the outlook, so they sell whenever the price reaches their desired level. And with enough of their shares, a resistance line is maintained until it’s exhausted by more and more buy orders. On the other hand, the buyers couldn’t wait for the price to fall back to its previous lows, they jumped in with strong interest, thus creating a demand line that tilts to the upper right. Towards the end of the formation (usually at about ¾ of the length of the triangle), people who wanted to sell have already sold almost all their positions. With new buyers entering the market, the price can be easily lifted, resulting in a valid breakout. The potential profit can be the height of the triangle. Technical traders usually pay close attention to a situation where an ascending triangle appears in a long downtrend and the price breaks above the resistance line, it generally means a bottom has formed.
Descending Triangle
A descending triangle is a chart pattern characterized by a descending upper trend line and a flat or nearly flat lower horizontal line acting as support, as shown in the picture above. This pattern indicates that the bears are more aggressive than the bulls as they slowly push the price lower, which solidifies the bearish trend. When this pattern occurs, there is a high probability of a downward breakthrough in the future. When the price approaches the horizontal support line, it bounces back until a breakout eventually occurs. When the price trades below the triangle, it usually means that the pattern is completed with continued downward momentum. The potential profit could be as much as the height of the triangle or more. Traders should be aware that false breakouts are possible if the price encounters resistance and rebounds. A rally after the breakout is generally below the support line of the descending triangle, and a flood of profit-taking or exit orders could continue to cause the price to fall sharply.
Symmetrical Triangle
Symmetrical triangles are the most neutral of the three patterns, formed by converging two trend lines that connect higher lows and lower highs towards a vertex. It’s a common form of consolidation, the price fluctuation appeared large at the beginning of the pattern and gradually becomes smaller and smaller, it indicates the battle between bulls and bears has changed from a large-scale match to close-range combat and neither party has the upper hand, so they reached a state of balance. After the price fell from the first short-term high, it was quickly bought up by the buyers, but the buyers have their doubts and were hesitant about the prospect, so the price failed to go back to the previous high. The price again went down but rebounded before it could fall below the previous low. The tug of war went on. The indecision between the long and short sides narrowed the fluctuation of the price, resulting in the formation of this symmetrical triangle as shown in the two pictures above.
Functionality
All three formations require a valid breakout to identify the next direction. The smaller the price range, the closer to the breakout. The triangle patterns are clearly recognizable with a possibility to generate a decent return. The pattern itself can help the trader to identify upcoming waves and set profit-taking and stop-loss accordingly. To utilize triangle patterns, traders usually enter a position right after the breakout or wait until the price tests the support trendline for the second time, and set the target profit-taking point to be the height of the triangle. Our triangle chart pattern indicator can help you capture all three triangle patterns promptly, it automatically detects and plots the triangle patterns for you. Further, it can also send you an alert about the formation.
Features:
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Limitations
An ascending triangle does not necessarily mean an upward breakout, and a descending triangle does not always end with a downward trend. After the consolidation phase, a new trend will emerge in one direction of the price breakout, it can be either continuation or reversal of the current trend, depending on where the pattern forms in the trend, i.e., if it occurs early in a trend, it’s likely to continue the previous trend, on the flip side, if the trend matures, the chance of reversal increases. Trader also needs to look at other technical indicators, such as divergence indicators, to further confirm the direction of the trend.