Triangle Chart Patterns
By Guy Bower of www.guybower.com*
Posted: Mar 3, 2006
Triangle chart patterns are a common sight within most charts and can be applied to a wide variety of markets and trading periods. They are a common occurrence and are all too often dismissed as being “too subjective” or things without a fundamental basis. This article hopes to dispel this way of thinking and show that triangle chart patterns derive their value from the fact that they graphically show the market’s psychology and underlying fundamental outlook, often before the fundamental evidence emerges.
Triangle chart patterns are generally considered a “continuation pattern”, and, as the name suggests, they indicate the continuation of the prevailing trend. The three broad triangle formations are symmetrical, ascending and descending.
Before exploring the main types of chart patterns, let’s examine what tools are used to identify the triangle chart pattern. Figure 1 shows that the major tools to identify a triangle formation are:
- Trend lines
- Base
- Apex
The Symmetrical Triangle (the Coil) -- A Neutral Indicator
The symmetrical triangle is a neutral market signal that reflects a pause in the current market trend. After the completion of the symmetrical pattern, the prior market trend resumes. For example, if a market was in an uptrend, the market, generally speaking, will resume the uptrend after the triangle has been resolved.
The trendlines are used to identify the triangle and act as pricing support and resistance levels. The minimum requirement for a symmetrical triangle is four reversal points. Although this might sound confusing, reversal points are simply areas in which prices change direction (e.g., Prices begin at a higher level; then end lower).
Symmetrical triangle patterns are commonly referred to as “coils”. This is because, as time progresses, prices trade within a tighter range, with the market making lower highs and higher lows. This is what gives this pattern its distinctive shape. The intuition behind this pricing behavior is that, because the market is in a neutral tone and lacking clear direction, traders are not prepared to push prices either higher or lower (i.e., tighter trading range). As a result prices, become increasingly tight (coil) as time progresses.
The triangle is resolved once the apex is penetrated. An important factor in determining whether the formation is a true triangle and whether the chart pattern has been completed is volume. Volume, like most charting patterns, acts as a confirmation tool. If prices convincingly trade through the trend lines, there should be a noticeable build in volume. This is because the market has found direction and traders waiting for clearer indications enter the market again.
The Ascending Triangle -- A Bullish Indicator
The ascending triangle shows two converging trendlines. One trendline is horizontal and connects a series of pricing peaks. The other trendline connects a series of higher lows, giving the triangle its ascending appearance.
The pattern is confirmed once the price breaks above the horizontal trendline. The breakout coincides with a sharp increase in volume.
The Descending Triangle -- A Bearish Indicator
The descending triangle is a bearish charting pattern that forms in the opposite direction from the ascending triangle.
Like all triangle patterns, it has two converging trendlines. The lower horizontal line connects a series of pricing troughs that act as support levels. The other trendline connects a series of lower highs.
Triangle patterns are relatively easy to identify and reliable market indicators. Technical traders should show caution in acting on them prematurely, though (i.e., trying to guess the direction of the breakout). Wait for clear triangle resolution and be careful of buying or selling into false breakouts.
*Reprinted (and modified) with permission from Guy Bower, the CEO of Commodity Warrants Australia, and Warwick Schneller, a Commodity Market Analyst at CWA, providing technical research services.
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