The Definition of Triangle Pattern in Trading
A triangle pattern forms when bulls or bears have a slight advantage. These patterns are usually trend continuation or confirmation patterns, but they can sometimes be found as reversal triangles. A triangle can be easily identified by drawing two trend lines through the highs and lows.
Types of Triangles
When traders doubt the future development of the market situation, their confidence drops. This leads to a decrease in volatility. The swings that are formed in the process form the triangles. For example, this happens prior to major economic news releases.
Triangles form on any trend. There are three main types:
- Ascending triangle
- Descending triangle
- Symmetrical triangle
Ascending Triangle
This figure usually forms on a downtrend. The price fluctuates in a small channel. The amplitude of its movement gradually decreases. The highs form the upper horizontal or near-horizontal side of the triangle. The lows gradually rise and form the upward lower side of the triangle.
Ascending Triangle
- Downtrend
- Highs
- Lows
- Resistance level
- Breakout point - buy signal
An ascending triangle forms when bears lose and bulls gain strength. When buyers take control of the market, the price breaks the upper horizontal edge of the triangle which serves as a resistance level. This breakout is usually accompanied by a fairly strong bullish momentum.
Usually, an ascending triangle indicates a trend continuation, but sometimes there are exceptions. That's why you should keep a close eye on the chart, as a breakout can happen in any direction and at any time. I recommend using volumes or Bollinger Bands to help determine the breakout's direction.
Descending Triangle
This pattern is formed in a growing market and usually indicates an imminent trend change. The emergence of a descending triangle tells about a growing uncertainty among buyers. Their strength begins to decline and bears come into play. When the sellers' strength significantly exceeds the buyers’, the price breaks the lower side of the triangle and gives a sell signal.
Descending Triangle
- Uptrend
- The highs (minimum of 3) gradually decline and form the upper descending side of the triangle
- The lows (minimum of 3) remain roughly the same and form the lower horizontal (or almost horizontal) edge of the triangle which becomes the support level
- The breakout point of the support level is a signal to open a sell trade
Trading Strategy
It’s too dangerous to trade within both triangles. The optimal solution is to wait for the price level to be broken and open a required trade:
- Buy position for an ascending triangle
- Sell position for descending figure
Most traders don’t wait for the breakout moment to enter the trade and place a pending order:
- Just over the horizontal resistance line for an ascending triangle
- Below horizontal support on a descending pattern
There is a chance of false breakout. More cautious traders wait until the breakout candle is completed and only then enter into a trade. There is no perfect trading method here. You can either wait for a strong breakout impulse, which will allow you to make a good amount of money, or scalp on the volatility in the middle of the triangle, whether it is descending or ascending. Choose the one that suits your risk preferences and stick to it.
In the next article, we will discuss how to trade a symmetrical triangle.