Probably the most prominent and most popular pattern found in any chart is the triangle pattern. Without using many tools or indicators, one can make easy assumptions regarding the direction of a trend by just using the triangle pattern. Be warned however that without the proper understanding of such a pattern can lead to costly wrong decisions and even misconceptions which can ruin a trader’s perspective of the market. In this article, we will share with you all you need to know about the triangle pattern, the different kinds of triangle patterns, and how to implement it on an actual trade on eToro.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is a triangle pattern?
A triangle pattern is a series of trend lines that form a triangle. It is composed of an upper trend line which is drawn by connecting at least two higher highs of the candles, and a lower trend line which is drawn by connecting at least two lower lows of the candles. Any one of the trend lines may lie flat on a horizontal line however both may not lie parallel from each other. According to experienced triangle pattern users, the longer the range which the triangle took to form, the longer or steeper the price rally.
As mentioned earlier, a triangle pattern can form on any trend – on an uptrend or downtrend or even during consolidation on volatile markets. It can signify either a continuation of a trend or a reversal depending on the particular triangle formation.
Types of triangle patterns
Other types and classifications of triangles such as pennant, segment, and others are mentioned in our other articles however for this particular topic, we’ll discuss the three general types of triangle pattern – and these are the ascending, descending, and symmetrical triangle.
Ascending triangle pattern
Ascending triangles as the name suggests is a triangle that points upward. Immediately this means that the trend is likely to go bullish or uptrend.
This is a bullish triangle pattern that usually forms in an uptrend. The lows are connected by a diagonal trendline. However, the highs are connected by a horizontal line (resistance, touching two or more price highs. Below is an illustration of an ascending triangle for the stock TSLA (Tesla). When this pattern forms, it’s very likely that the uptrend will continue.
To draw an ascending triangle pattern on a chart, simply connect the higher highs with a horizontal line and the lower lows with a diagonal line. A breakout happens just as soon as the upper trend line is breached or broken.
Descending Triangle Pattern
The descending triangle pattern on the other hand is the counterpart of the ascending triangle pattern. It signifies a bearish outcome after the pattern has been established.
To draw a descending triangle pattern on a chart, simply connect the lows using a horizontal line and the highs with a diagonal line that goes down. As you may have noticed with both the ascending and descending triangle patterns, one trend line should always lie on a horizontal line to be considered as such a patterns.
The image below shows an actual example of a descending triangle pattern for the stock SLE (Energy Select Sector). As soon as the triangle has been formed and the lower trend line has been broken, a very steep price drop has occurred.
According to many triangle pattern users, the range at which the triangle has been formed will dictate just how much the price will change. While this still needs to be verified, we can see in the example below that it almost matches the range of the triangle formation to the height of the price drop.
Symmetrical Triangle Pattern
Last but not least is the symmetrical triangle pattern. This triangle pattern actually forms in volatile markets where bullish and bearish trends are trying to duke it out. Without the knowledge of using triangles, one would easily give up and stay away from trading these kinds of candle formations. However, by using a symmetrical triangle pattern, finding a safe entry and exit point would be possible.
The symmetrical triangle pattern takes its name from its symmetric sides. This means both upper and lower trend lines have almost the same angle from their vertex or where the two lines meet. A breakout happens depending on which trend line is breached or broken.
The images below show a bullish symmetrical triangle pattern for TESLA and a bearish symmetrical triangle pattern for NATGAS.
We can see from both examples that there were multiple instances of the higher highs and lower lows touching the trend lines. The more highs and lows touching the trend lines mean more accurate plotting of the triangle.
How to implement the triangle pattern on an actual trade
Now that you know what a triangle pattern is along with its technical layout, how would you effectively implement it on actual trading?
First of all, you need to bear in mind the particular trend of the market you’re focusing on. If it is an uptrend, then there is a great chance that you’ll be finding an ascending triangle – otherwise, it’s a descending triangle pattern if it’s a downtrend. Likewise, for volatile markets, you should expect to see a symmetrical triangle from the “tug-of-war” of the prices.
With regards to entry and exit points, a strong price movement with considerable volume would be a great indicator of a breakout. The breakout should be composed of a thick-bodied candle for it to be considered as a “true breakout” – as was shown in the examples.
Prior to the breakout, we can also notice a momentary decrease in volume which means traders are preparing for something big – like a breakout.
Our final thoughts
Many traders use the triangle pattern for short intervals however it is also been known to be effective with long-term range. While the pattern is already very much reliable on its own just as long as the proper trend lines are drawn, adding indicators would further improve the accuracy and assessment of the pattern.
A good indicator to incorporate with triangle patterns is the MACD. MACD stands for Moving Average Convergence/Divergence and it is designed to provide an estimate of the changes in momentum, strength, as well as the length of life of a trend. It is made up of at least two moving averages in which indicates trend reversal when the two moving averages intersect.
By incorporating MACD indicators with triangle patterns, a trader will be able to confirm whether a breakout is really a “real breakout”. The MACD indicator will also let the trader know if it’s time for the price to move based on the performance of the moving averages.
With the knowledge you’ve gained about triangle patterns, you will be more than ready to handle trades when such patterns show up. But then again, knowing is not enough – you need to put it into practice. With an eToro virtual account, you’ll be able to master the triangle pattern on actual trades without having to spend real money. Once you’re ready for the real thing, you can always go to your Real Portfolio.
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