The Technical Analysis of Triangle Patterns
A triangle is formed when lines drawn on a daily chart through a stock’s highs and lows converge, forming an apex. The triangle is “laying” on its side, with its base as a perpendicular line and the apex pointing to the left or to the right. Triangles can be symmetrical, descending, ascending or inverted, and are sometimes called coils.
Other People Are Reading
-
Types of Triangles
-
A triangle is called symmetrical when its sides converge at the apex at more or less the same angle.
A descending triangle is a right-angle triangle with a horizontal bottom side and a downward slanting upper side.
An ascending triangle is a right-angle triangle with a horizontal top side and an ascending bottom side.
A triangle with its apex pointing to the left and base on the right is called an inverted triangle.
Reversal vs. Continuation Formations
-
Triangles can be both reversal and continuation formations--indicating either a reversal or a continuation of the current trend.
-
Predictive Value
-
A symmetrical triangle does not predict the direction of the move—the breakout can occur either to the upside or the downside. A descending triangle is generally bearish while an ascending triangle is mostly bullish. Inverted triangles are more common at the tops and bottoms and are more likely to be reversal formations; they are sometimes called broadening tops or bottoms.
Breakout
-
A breakout occurs when a stock stages a decisive penetration of the upper or the lower side of the triangle. A penetration is decisive when the price closes outside the formation on above average volume. Breakouts that occur early on--for instance, long before the stock reaches the imaginary apex formed by the converging sides--are more reliable. If a stock reaches the apex without breaking out, it usually indicates a weak technical formation or a chart’s failure.
Variations
-
There is no Chinese wall between chart patterns. A triangle may be a part of a larger pattern, evolve into another pattern, fail all together or be considered a wedge if it is somewhere between symmetrical or ascending/descending triangles, in that its sides slant at different angles while pointing in the same direction (up or down). Some technicians may see a rounding top or bottom where others see a triangle. It is sometimes a matter of school, interpretation, terminology or chart time frame.
-
References
- Photo Credit pen showing diagram on financial report/magazine image by Anton Gvozdikov from Fotolia.com
