3.12 Trading with Triangle Chart Patterns
Triangle patterns appear on a trading chart in either of the following conditions:
- when the lines joining the lows and highs have opposing slopes and converge to make a triangle.
- One of above mentioned lines of support or resistance is slopping and another remains horizontal. In this case also the converge together and form a triangular shape.
Triangles are generally considered to be continuation patterns though at times they double up as a reversal kind of guy.
What’s important is that triangles can give you a breakout towards either side of the market, and therefore we need to trade these chappies with caution!
Did we say "caution"? Well, wait till the end and you will say "trading with the triangles is a piece of cake!!!"
This pattern looks neat and pretty – hence ‘symmetrical’ but the underlying market action is really give-and-take between the bulls and bears, and heading gradually to a showdown!
A symmetrical triangle may not be completely symmetrical but said to be so when the line joining the lows i.e. the support line and the resistance line which joins the highs slope in opposite direction to form a triangle. In other words it means that the "lows" are getting higher and the "highs" are getting lower.
Look at the Forex chart above and note how the pattern is really like a coil about to spring open. It represents bears willing to sell at lower and lower prices (the top downward sloping line) and bulls eager to buy at higher and higher prices (the bottom up sloping line). Which side will prevail? No one knows until prices finally break out of the pattern, somewhere near its apex (point), to move up or to decline.
How do you trade a situation like this? Simple. Be prepared to cash in on both kinds of moves! Place a buy order just above the sloping upper line and a sell order just below the up sloping line. There, now you can reach for the cappuccino, shut your eyes and imagine laughing to the bank.
But if one of your orders is hit, please, please cancel the other one, pronto!
Let's see how the breakout of the symmetrical triangle in the above chart took place:
As clear from the above weekly chart of USD/JPY that the price-action broke upwards and the moved up by close to 600 pips. Was the game over? Actually not in this case, let's check what happened next:
Whoops!!! A gain of close to 2,700 pips!!!
Well, let's not get too excited. The situation will be different each time and it is better to target the first profit taking when post breakout a move equal to the wider side of the triangle is over. What we meant by wider side is indicated as "Turned Base" in the first chart above. First profit taking can be done by closing half the position and moving the stop-loss of the remaining high above the entry point.
In the above example the breakout happened on the upside however, a downward breakout is equally possible. Hence it's always better to put a limit order for buying and selling on either side i.e. upside and downside respectively. These orders can be entered when the lines are about to converge to complete the triangle.
Trading with Long-Term Symmetrical Triangles
In the above example you learned how to trade with triangle breakouts. However, other opportunities will be trading within the triangles by buying when the price hits the support line and selling when it hits the resistance line. The following chart is a classic example when a symmetrical triangle controlled the price action of GBP/USD for 5 years.
An ascending triangle is made up of a horizontal line or price which is choc full of bears eager to dump their positions, a ‘supply’ line so to speak, and an upward sloping line representing increasingly impatient bulls, a ‘buy’ line you may say.
As the pattern progresses, bulls along the buy line are steadily absorbing supplies from the bears along the horizontal line at steadily higher and higher prices. Ultimately prices will break out depending on whether the supplies are exhausted with bulls still wanting more (break to the upside), or if supplies overwhelm the bulls (break to the downside).
Generally this pattern is known to favor the bulls, but practically it is equally prone to favor the bears by downward breakouts.
So trade it like the symmetrical triangle – an order for either eventuality! Of course, one cancels the other if hit!
OK, OK, I can imagine you mouthing ‘…mirror image of the ascending triangle....’ and so on! So now we’re getting smart are we? But we’re happy that you now appreciate that the market is but two sides of a coin, bullish now, bearish next.
As you can see from the above chart, the descending triangle has a supply line that is sloping downwards and a horizontal buy line. What’s happening? Sellers along the supply are willing to sell at lower and lower prices to bulls determinedly buying up the available offerings around the support line. Again, like in the ascending triangle, ultimately prices will break out depending on whether the supplies are exhausted with bulls still wanting more (break to the upside), or if supplies overwhelm the bulls (break to the downside).
Generally, sellers have the upper hand with this pattern, but sometimes, bulls manage to assert themselves and the pattern resolves to the upside. So be prepared for either possibility by placing an order on either side of the pattern.
What if your position goes for a loss?
The above chart is a classical example that any chart pattern may fail. However, sometimes it presents you the second opportunity and when that comes, you should be ready to grab it. The upside breakout failed to sustain in the above example. In case a trader would have taken a long position, he or she would have ended up with losses. However, the price-action fell back inside the triangle and then a downside breakout took place, giving an opportunity for ample profits to make your year.
- Trading with Triangle chart patterns