Triangles
Symmetrical Triangle
A symmetrical triangle forms when the price action creates a series of lower highs and higher lows. The pattern looks like a triangle that is symmetrical, with both sides sloping towards a point.
Characteristics
Converging Trendlines: Two trendlines converge towards each other. One is drawn along the peaks, and the other is drawn along the troughs.
Duration: This pattern can last from a few weeks to several months.
Volume: Volume tends to decrease as the price moves closer to the apex of the triangle.
Trading the Symmetrical Triangle
Breakout Direction: A breakout can occur in either direction, so it's crucial to wait for a confirmed breakout.Entry Point: Traders typically enter a position when the price breaks out above or below the trendlines.
Target Price: The potential price move after the breakout is generally considered to be equal to the height of the triangle at its widest point.
Ascending Triangle
An ascending triangle forms when the price action creates a series of higher lows and a horizontal resistance level. This pattern suggests that buyers are becoming increasingly aggressive.Characteristics
Rising Trendline: A trendline is drawn along the higher lows.
Flat Upper Boundary: A horizontal line is drawn at the level where the price has repeatedly faced resistance.
Volume: Volume often decreases during the formation and increases at the breakout.
Trading the Ascending Triangle
Bullish Pattern:This pattern typically indicates a bullish continuation.Entry Point: Traders usually enter a long position when the price breaks above the horizontal resistance.
Target Price: The target price is often the height of the triangle added to the breakout point.
Descending Triangle
A descending triangle forms when the price action creates a series of lower highs and a horizontal support level. This pattern suggests that sellers are becoming increasingly aggressive.
Characteristics
Falling Trendline: A trendline is drawn along the lower highs.Flat Lower Boundary: A horizontal line is drawn at the level where the price has repeatedly found support.
Volume: Volume often decreases during the formation and increases at the breakout.
Trading the Descending Triangle
Bearish Pattern: This pattern typically indicates a bearish continuation.Entry Point: Traders usually enter a short position when the price breaks below the horizontal support.
Target Price: The target price is often the height of the triangle subtracted from the breakout point.
Key Points to Consider
Importance of Volume
Volume is a critical component in confirming the validity of the breakout from the triangle pattern. A significant increase in volume at the breakout point adds credibility to the move.
False Breakouts
False breakouts can occur, where the price moves beyond the triangle boundary but then reverses direction. To mitigate this risk, traders often wait for a candlestick close beyond the trendline and look for additional confirmation signals.
Context of the Pattern
The effectiveness of triangle patterns can be influenced by the overall market context. They are more reliable in trending markets and can be less effective in sideways or choppy markets.
Combining with Other Indicators
Traders often use triangle patterns in conjunction with other technical indicators, such as moving averages, RSI, MACD, and Fibonacci retracements, to improve the accuracy of their trades.
Practical Example
Symmetrical Triangle in EUR/USD
1. Formation: Assume EUR/USD forms a symmetrical triangle over two months with lower highs and higher lows.
2. Breakout: The price breaks above the upper trendline, indicating a potential bullish continuation.
3. Volume Confirmation: Volume increases significantly at the breakout point.
4. Entry: A trader enters a long position at the breakout price.
5. Target: The height of the triangle at its widest point is 200 pips, setting a target of 200 pips above the breakout point.
Ascending Triangle in GBP/JPY
1. Formation: GBP/JPY forms an ascending triangle over six weeks with higher lows and resistance at 150.00.
2. Breakout: The price breaks above 150.00.
3. Volume Confirmation: Volume increases at the breakout.
4. Entry: A trader enters a long position at the breakout price.
5. Target: The height of the triangle is 300 pips, setting a target of 300 pips above the breakout point.
Descending Triangle in USD/CHF
1. Formation: USD/CHF forms a descending triangle over three months with lower highs and support at 0.9000.
2. Breakout: The price breaks below 0.9000.
3. Volume Confirmation: Volume increases at the breakout.
4. Entry: A trader enters a short position at the breakout price.
5. Target: The height of the triangle is 250 pips, setting a target of 250 pips below the breakout point.
Conclusion
Triangles are powerful patterns in forex trading that help traders anticipate potential price movements. By understanding the characteristics and trading strategies associated with symmetrical, ascending, and descending triangles, traders can make more informed decisions and improve their chances of success. However, it is essential to use these patterns in conjunction with other technical tools and maintain a disciplined approach to manage risks effectively.