The triangle pattern is one of the most important continuation patterns in technical analysis. The ability to recognize the triangle pattern will significantly benefit your trading success, and help you become a better trader. This article will teach you how to recognize the triangle and how to use it for your trading, which are vital skills for any trader.
There are three types of triangles:
Each of them is determined by two lines that contain the price within them while they are approaching each other. Eventually, both lines will cross. For predicting future price movements, the shape of the triangle itself is not as important as the direction in which the market breaks out of the triangle.
Here are examples for a descending and an ascending triangle.
A triangle most commonly occurs when a trend line is approaching a resistance or a support level. In this case, the price is contained between the resistance or support level and the trend line. At first, there is still a lot of room left for prices to move up and down. Over time, however, the resistance / support level will remain constant, while the trend line will either rise or fall, depending on whether the market is currently in a bullish or in a bearish trend.
Eventually the resistance / support level and the trend line will meet. When this happens, or shortly before it will happen, one of the two containing elements has to be broken. Which one is broken first will determine the market’s future direction.
In most cases the resistance / support level is broken first. Usually, a trend line has been well established over time and is more valid than any resistance / support level with only a few confirmations. Triangles, therefore, are most commonly seen as continuation patterns.
In an uptrend, for example, a triangle is considered as a sign of increasing demand, as indicated by the increasingly higher lows. As technical analysts conclude, traders are willing to buy into the asset for increasingly higher prices, which will eventually push the market over the resistance level. In a downtrend, on the other hand, demand seems to decrease while traders are willing to sell their assets for continually declining prices. Eventually, this will push the market below the support level.
As a trader, you can benefit from the Triangle pattern in a number of ways:
In the early stages of the Triangle pattern, when prices approach the resistance level or the trend line, you know to stay from any options that would require the market move past this price levels. You also know to expect low volatility, which is bad environment for trading a boundary option. In the later stages, though, when you are beginning to expect the price will break out of the triangle soon, you can invest in a boundary option, as long as it offers a realistic target price and an appropriate expiration time.