Triangle Pattern: Meaning & Type of Triangle Pattern

Triangle pattern

Introduction

A triangle is a continuous pattern on a chart that resembles a triangle in technical analysis. Similar to wedges and pennants, triangles may either be a continuation pattern if they are confirmed or a potent reversal pattern if they are not. As price activity fashions a holding pattern, one of three possible triangle variations—ascending, descending, and symmetrical triangles—can emerge.
The upper and lower trendlines eventually cross at the apex on the right side to form a corner, giving triangle patterns their name. The remaining two corners of the triangle are completed by joining the top trendline’s starting and the lower trendline’s beginning. In contrast to the lower trendline, which is created by connecting the lows, the upper trendline is created by connecting the highs.
Similar to wedges and pennants, triangles may either be a continuation pattern if they are confirmed or a potent reversal pattern if they are not. As price activity fashions a holding pattern, one of three possible triangle variations—ascending, descending, and symmetrical triangles—can emerge.
A breakout or failure of a triangle formation, particularly on high volume, is viewed by technicians as powerful bullish or bearish signs indicating a continuation or reversal of the previous trend.

What is a triangle pattern?

The best way to characterize triangles is as horizontal trading patterns. The triangle is at its widest point at the beginning of its development. The trading range narrows as the market keeps moving in a sideways pattern, and the triangle’s tip is created. The triangle, in its most basic version, illustrates how both the buy-side and the sell-side are losing interest in a certain subject as the supply line contracts to match the demand.
Consider the bottom triangle line, or lower trendline, as the demand line, which on the chart denotes support. The issue is now being purchased at a faster rate than it is being sold, which causes the stock price to increase. The supply line, which forms the triangle’s top line, stands in for the overbought side of the market when investors are selling their positions and taking their winnings with them.

Types of triangle pattern

Ascending triangle

Ascending triangle patterns are bullish, which means they suggest that when the pattern matures, the price of an asset is expected to increase. Two trendlines are used to form this pattern. When price successfully breaks above the first trendline, which is flat and runs along the top of the triangle, it denotes the start or continuation of an uptrend.
A line of ascent created by a string of higher lows forms the second trendline, which is the bottom line of the triangle indicating price support. The triangle is produced by this pattern of rising lows, which gives it a bullish interpretation. The pattern shows that sellers are less successful in their efforts to drive prices lower each time, which is the fundamental interpretation of the pattern.
The price of a security oscillates back and forth between the two lines, forming the rising triangle pattern. Prices rise to a peak, which ultimately encounters resistance and results in a decline when shares are sold.
The fact that each sell-off after hitting resistance ends at a higher level than the last sell-off effort shows that even while the price may repeatedly fail to overcome the barrier, this does not give sellers more strength. Price eventually overcomes the upward barrier and resumes its upward path.
The ascending triangle pattern is frequently seen as a consolidation and continuation pattern when the price is already in an overall uptrend. When an ascending triangle pattern appears amid a general market slump, it is sometimes seen as a potential sign of an upcoming upside market turnaround.

Descending triangle

A descending triangle design is the exact opposite of the pattern we just reviewed, which should not be surprising given its name. As the triangle pattern completes itself, it sends traders a negative signal, suggesting that the price will drop further. Once more, a pattern is formed by two trendlines, but in this instance, the bottom supporting line is flat and the upper resistance line dips downward.
A descending triangle is a frequent continuation pattern that emerges in a decline, just as an ascending triangle frequently forms in an overall rally. It is typically seen as an indication of a potential market reversal and trend change if it occurs during a long-term upswing.
When a security’s price declines, bounces off the supporting line, and then rises, this pattern forms. Each attempt to raise prices, though, fails to the same extent as the one before, and finally, sellers seize control of the market and drive prices below the triangle’s supporting bottom line.
The falling triangle pattern’s prediction that prices are declining is supported by this activity. When the downward breakout occurs, traders can sell short with a stop-loss order set just above the price that was the peak during the triangle’s formation.

Symmetrical triangle

Symmetrical triangles are frequently seen as consolidation patterns by traders and market experts, which may indicate either the continuance of the current trend or a trend reversal. As a security’s trading range narrows, gradually ascending support lines and lowering resistance lines converge to produce this triangular pattern. The price of a security will typically oscillate back and forth between the two trendlines as it moves toward the triangle’s apex before finally breaking out in one way or the other and developing a long-lasting trend.
Watch out for a breakthrough below the ascending support line, which would signal a market reversal to a downtrend, if a symmetrical triangle forms after a bullish trend.
On the other hand, a symmetrical triangle that has been formed after a prolonged bearish trend has to be watched for an upside breakout signifying a positive market reversal.
The momentum created when price breaks out of the triangle is typically enough to carry the market price a considerable distance, regardless of whether the breakout proceeds in the direction of maintaining the current trend or in the direction of a trend reversal.
As a result, traders may reasonably interpret the breakout from a symmetrical triangle as a strong hint of the direction of the next trend. Once more, the triangle formation makes it simple to identify appropriate stop-loss order levels—below the triangle’s low when buying, or above the triangle’s high when selling short.

How to trade in triangle pattern

Two highs, where the second high is lower than the first, and two lows, where the second low is higher than the first, are required for a symmetrical triangle to have at least four points. Triangles can have ascending or falling slopes, with ascending triangles having higher highs than descending ones and descending triangles having lower lows than ascending ones.
A strong preceding trend, such as one that is at least a few months old when looking at a daily chart, is necessary for the formation of a triangle. Drawing a line from the first high to the second and continuing it while drawing a line from the first low to the second and continuing it should result in a triangle as the two lines connect for all three types of triangle patterns.
More high and low points added to the lines further enhance the triangle pattern recognition. Volume ought to decrease as the stock moves further into the triangle formation over time. On a daily chart, triangle formations often persist for one to three months or longer before a breakout happens, or when the stock price moves outside the triangle’s lines.
If the triangle is measured from the apex to the base of the lower trendline, the breakout should occur halfway to three-quarters of the way to the triangle’s apex for the best price movement. As the stock has not yet fully consolidated, a break before or after this point may not be important, or the breakout may seem inevitable as the peak approaches.
It’s crucial to pay close attention to the breakout’s intensity and direction. In a symmetrical triangle, the initial break should indicate whether the preceding trend will continue or reverse, but it is crucial for traders to verify the breakout before trading because reversal triangles sometimes have false breakouts.
Strong breakouts will be accompanied by an increase in trading volume, especially for uptrends, move the price by at least a few percent, and linger for several days. The breakout price levels and apex generally serve as support or resistance levels after the breakout.
Calculate the triangle’s base, or the distance between its widest high and low points, then multiply it by the price at the breakout point to get an idea of the price goal. Alternately, make a trendline that runs parallel to the lower triangle line and starts at the triangle’s highest high.

Conclusion

The early breakouts of these patterns, including the symmetrical triangles and those on the bullish and bearish sides, are known to offer investors a “head fake.” After the breakout, wait a day or two to assess whether the breakout is genuine. In a bullish chart pattern, experts prefer a one-day closing price above the trendline, while in a bearish pattern, they prefer a closing price below the trendline. To validate your entry signal, keep in mind to search for volume during the breakout and a closing price outside of the trendline.