Thu, 26 May 2022

3 Types of Triangle Patterns in Trading

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08 May 2022, 19:24 GMT+10

The triangle patterns are among the most common and recognizable trading patterns, appearing in the price action of nearly every market. It is a smooth, rounded pattern that usually indicates the price will drop. While it might not seem like there are many variations of the triangle patterns, various market conditions cause the same basic pattern to appear in slightly different forms. Let's look at the different types of triangle patterns and how to recognize them in trading.

The Broken Triangle

The broken triangle pattern is the most basic form of the triangle and represents a normal profit-taking consolidation. It also might be called a consolidation reaction and a bad break. The broken triangle looks like a triangle with a wedge taken out of it. Like most triangle patterns, the broken triangle is formed by a down leg, an up leg, and a third leg that is smaller than the other two.

As with all patterns, it is important to pay attention to how the price action concerning the pattern develops, looking for any changes in structure or intensity of price movement. Three factors can identify the broken triangle:

  1. The first leg down is the biggest price move in the pattern.
  2. The second leg up is smaller than the first and retraces less of the first leg's high-low range.
  3. The third leg is smaller than the second and retraces less of the second leg's high-low range.

The broken triangle pattern represents a normal profit-taking consolidation after a large move in an instrument or index. (See Figure 91.) As price consolidates or consolidates further, traders look for evidence that this pattern will develop into a bullish continuation pattern.

Price moves up over an extended period without any prior information that a breakdown was coming. Price recovers all its losses at once. Price appears to form two triangles instead of one. There is no new trend line established. Price breaks out below the support level at the neckline.

The general rule that price should recover all losses at once is based on the fact that traders tend to follow price, move close to it, and then hit when the opportunity presents itself. When the price hits a resistance level, traders get emotionally attached, watch as the price breaks through this resistance level, and then follow it lower (sells into the strength of a rally). This is what produces the broken triangle pattern. If you are looking for this pattern, look for bullish consolidations that last longer than normal and produce a large movement within the trend. A successful breakout usually shows at least one higher high with no prior indication of an uptrend in progress.

The Ascending Triangle

The ascending triangle patterns are extremely bullish and warn that a major breakout is coming. It looks like a double-crescent moon. The ascending triangle is formed by a sideways consolidation, with the price moving above the neckline. Once the price breaks out of the consolidation, it quickly moves up and then represents a confirmed resistance level break.

As with most patterns, the ascending triangle can be identified by three factors:

  1. The first leg up is the biggest price move in the pattern.
  2. The second leg up is smaller than the first and retraces less of the first leg's high-low range.
  3. The third leg is bigger than the second and retraces more of the second leg's highs-lows

The ascending triangle patterns look like a normal profit-taking consolidation with the price moving above a resistance level before breaking out on a new trendline. Traders use this breakout to indicate that a major move is likely to follow.

Price makes a series of higher lows; Price makes a series of higher highs. Price appears to form two triangles instead of one. There is no new trend line established; the Price breaks out above the resistance level and continues in an upward movement (a breakout)

The ascending triangle is considered bullish because it shows the price pulling back from a strong move in an attempt to determine whether the uptrend is over or not. The flagpole at the top of the triangle acts as a resistance level and, if broken, is generally followed by a powerful move up. If you are looking for this pattern, look for bearish consolidations that last longer than normal and produce a small move within the trend. A successful breakout usually shows at least one lower low with no prior indication of a downtrend in progress.

The Descending Triangle

The descending triangle patterns are extremely bearish patterns that warn that a major breakout is coming. It looks like this:

As with most patterns, the descending triangle can be identified by three factors:

  1. The first leg up is the biggest price move in the pattern.
  2. The second leg up is smaller than the first and retraces less of the first leg's high-low range.
  3. The third leg down is bigger than the second and retraces more of the second leg's highs-lows

The descending triangle patterns look like a normal profit-taking consolidation with the price moving below a support level before breaking out on a new trendline. Traders use this breakout to indicate that a major move is likely to follow.

Price makes a series of lower lows Price makes a series of lower highs Price appears to form two triangles instead of one. There is no new trend line established. Price breaks out below the support level and continues in a downward movement (a breakdown).

The descending triangle is considered bearish because it shows the price recovering from a strong move in an attempt to determine whether the downtrend is over or not. The flagpole at the bottom of the triangle acts as a support level and, if broken, is generally followed by a strong pullback. If you are looking for this pattern, look for bullish consolidations that last longer than normal and produce a large movement within the trend. A successful breakout usually shows at least one higher high with no prior indication of an uptrend in progress.

Conclusion

These three different types of triangle patterns all have a critical role in the price action of any market. By looking for these basic characteristics and paying attention to how price action develops, you will be able to recognize them a lot more quickly. With an understanding of how triangle patterns develop, it's more likely that you'll become able to use them in your trading.

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