Triangle Patterns
Triangles
are known as continuation patterns, meaning the trend stalls out to gather
steam before the next breakout or breakdown. They are named triangles as the
upper and lower trend line eventually meet to form a tip and connecting the
starting points of both trend lines completes a triangle shape. The support trend line continues to close the
channel until the resistance price level breaks on heavy volume to resume the prior trend again. There are
three types of triangle patterns.
Ascending Triangles
Ascending
triangles are bullish continuation patterns that form when the upper trend line
is flat or horizontal while the lower trend line continues to rise diagonally.
This indicates the up trend has stalled while the support line
representing buyers continues to rise, thereby closing the distance between the
lower and upper trend line. Eventually the lower trend line closes in the gap
enough to cause impatient bidders to come off the fence in a buying spree that
surges the price through the upper trend line resistance with
heavy volume. This breakout action resumes the next leg on the up trend as
prices climb to new highs.
Descending Triangles
Descending
triangles are bearish continuation patterns. They are an inverted version of
ascending triangles. The form as a downtrend stalls out. The lower support
trend line goes flat or horizontal as the upper trend line continues to fall
diagonally closing the gap. The upper trend line represents sellers anxious to
unload their position by lowering the ask/offer prices. Eventually sellers get
impatient and overwhelm the support trend line by dumping shares. This triggers
panic as the price collapses in a breakdown that kick starts the next leg of
the downtrend making new lows.
Symmetrical Triangles
Symmetrical
triangles are continuation patterns of the prior trend, which may be bullish or
bearish. These are indicated with a falling upper trend line and a rising lower
trend line. This indicates both the sellers lowering their offers, while buyers
are raising their bids. Eventually, one of the trend lines will break to trigger
the next leg in the preceding trend. These triangles usually will have three
contact points before they trigger the break. This means the lower, upper and
lower or upper, lower and upper trend lines tag prior to the break that resumes
the earlier trend. The longer the triangle goes without a break as the price
gets closer to the pinnacle, the greater the chances of a failure.
Triangle Failures
When the
triangles fail to break the resistance trend line and actually break through
the support trend line, it is considered a failed triangle pattern. Failed
patterns can result in strong trend reversals. Traders should be prudent with
stop-losses when a triangle pattern fails. Seasoned traders will look to
reverse their positions or enter the trend reversal when this occurs to
capitalize on the potential panic reaction from the trapped participants that
expected the triangle to form.
