Technical Analysis is one of the most well-known trading and investing strategies, and pattern trading is among the most popular TA methods. Pattern trading seeks to impose order upon the market’s seemingly random, chaotic movements. Many chart patterns exist, like the double top, head and shoulders, and more. Today we’ll discuss the triangle pattern, one of the most common and useful patterns for trading. In this article, you’ll learn how to understand and identify the pattern and take advantage of its presence on the chart. 

What are triangle patterns?

Triangle patterns are continuation patterns that fall into three types: ascending, descending, and symmetrical. These naturally occurring price actions indicate a pause or consolidation of prices and signal a potential trend continuation or reversal, depending on which side the price breaks out.

Ascending triangle

This pattern forms when a security’s price creates a higher low point while its upper boundary remains relatively flat. The ascending pattern generally signals a potential bullish continuation as buying momentum gradually strengthens, leading to an eventual breakout above the upper trendline.

Descending triangle

On the other hand, a descending triangle pattern forms when the security creates a lower high, but its lower boundary stays relatively flat. This pattern generally signals a potential bearish continuation. As sellers gain control, the pattern would eventually break below the lower trendline and continue.

Symmetrical Triangle

This pattern occurs when the price of an asset forms both lower highs and higher lows, showing a contraction of the price range. This leads to two converging trendlines meeting at a point. A Symmetrical triangle suggests that the asset is consolidating and neither buyers nor sellers have a clear advantage. It’s important to watch for a breakout in either direction to confirm the next move.

Entering and exiting triangle patterns

Traders have learned different ways of trading the triangle pattern over the years. The most common way is to wait for the breakout and exit at the projected height of the triangle. Consider the example below:

When the price peaked at point #1, it made a sharp correction and marked a low at point #2, then the price started to test the resistance and failed at #3. Prices corrected again but only made a higher low for the swing at #4, showing how volatility is contracting while keeping below the established resistance. Price eventually broke out at #5, but sellers started cashing out on their gains, bringing the price below resistance again. However, positive buying pressure pushed the price upward through the resistance line. 

Once resistance is broken and prices are treading new levels, a trader can use the height of the previous ascending triangle pattern at its thickest point to mark an exit. Descending triangles follow the same principle.

In an example of symmetrical triangles, you can see in the sample above where the price converges to the center, potentially trapping bears or bulls. Since there is no general direction for symmetrical triangles, waiting for the price to break the triangle is highly suggested. For this case, traders can enter a long position when the price breaks through the upper line of the pattern. 

These are just basic ways of entering and exiting patterns. Traders can enter trades on established resistance or support lines within the triangle and prior to a breakout to maximize their potential gains. Of course, this entails proportional risks as patterns can fail (more on failing patterns later.) They can also wait for the retest after the breakout to ensure the pattern is complete before entering a trade. This all depends on your risk tolerance. 

Failed Patterns

Traders and investors should note that chart patterns are not fool-proof. They can signal a clear move and then fall in the opposite direction. However, we can still take advantage of failed patterns with the right timing. 

In the chart below, META was continuously trending upwards until reaching a peak at the $384.00 area. Prices then started consolidating and forming a symmetrical triangle. After a few trading sessions, it seemingly broke out through the upper line, signaling an upward move. However, selling pressure won out, and prices went in the opposite direction. This type of price breakdown gives traders a potential entry for a short position where they can ride the price drop to an established support level.

Pros of pattern trading 

Trading triangle patterns can be a rewarding strategy once mastered, bringing traders to new heights in profitability. Here are its advantages. 

Clear entry and exit points

Pattern trading’s main advantage is its clearly defined entry and exit points. This systematic approach arms traders and investors with proper expectations before entering the trade, therefore making informed decisions.

Versatility

Triangle patterns appear in various timeframes, making them effective tools for spotting potential entries and exits. Traders and investors can use them for short-term and long-term positions. 

Risk Management

With its systematic approach to entry and exit that provides clear price targets and stop-loss levels, triangles can help traders and investors with risk management. This ensures traders and investors limit losses and maximize profits.

Cons of pattern trading 

Like anything else in trading and investing, the risks should always be weighed against the potential benefits. Here are the disadvantages of triangle pattern trading. 

Subjective Analysis

While patterns are rewarding when identified and meet general expectations, identifying triangle patterns requires subjective analysis and sometimes leads newer traders to force-fit patterns to conform to the potential trade. This misinterpretation can lead to losses. 

False Breakouts

One of the significant drawbacks of trading any kind of pattern is its possibility of giving false breakout signals. Even if a price appears to break out of the triangle and leads traders to enter positions, it can suddenly make a quick turn and lead to whipsaws, trapping and forcing traders into unfavorable positions. 

Not always present

While triangles are powerful patterns when identified, they are not always visible in the markets. During certain market conditions, some patterns may be more present, leading to opportunity loss.

Conclusion

Any seasoned trader can attest to the power of triangle patterns and their importance in a trader’s toolkit. Despite its drawbacks, it can provide consistent profits when mastered. With practice and experience, you, too, can master the art of pattern trading and add another profitable strategy in navigating the financial jungle.

This article From Pattern to Profits, a Primer on Triangle Patterns originally appeared on Rick Orford - Helping You Invest In Yourself.