A “Triangle” pattern involves price moving into a tighter and tighter range as time progresses and provides a visual display of a tightly contested battle between buyers and sellers. Eventually one side is victorious and a strong move away from the pattern may occur. The triangle pattern is generally considered to be a “continuation pattern”, with the anticipation that price will resume moving in the direction it was headed prior to the pattern appearing. Often triangle patterns serve as a consolidation phase where price regains the strength it needs to proceed in its primary trend.
Triangle Pattern Types
Triangle patterns can form in one of several different ways:
- Symmetrical Triangle, which can continue or reverse the price trend
- Ascending Triangles, which are generally considered bullish
- Descending Triangles, which are generally considered bearish
The widest point of the triangle occurs when the pattern is first forming. This is the case whether price is trending downward or upward before it enters the pattern. The battle between buyers and sellers results in prices successively traveling less distance up and down and reversing direction more quickly as the pattern progresses. This creates pressure similar to a compressed spring which eventually resolves itself with strong movement.
A triangle pattern is generally considered to be forming when it includes at least five touches of support and resistance; three touches for one of these lines and two for the other.
How Triangle Patterns Form
The triangle pattern is formed when:
1. A security’s price reaches a point in its trend when it loses strength and reverses.
2. This price trend continues until it encounters pressure from the opposing direction and reverses again. During this price consolidation volume may increase in the direction of the original trend and eventual breakout. This is the first clue that a triangle pattern may be forming.
- Within a triangle pattern, each successive reversal takes less time and distance to exhaust itself before reversing. In addition, following a reversal within the triangle, price may not move all the way back to the prior support line for bullish patterns or the prior resistance line for bearish patterns.
- In an Ascending Triangle, strength from buyers causes price to reach roughly the same resistance level during each advance, but each decline within the triangle ceases at a slightly higher low than the one before it. This underlying strength as the pattern develops alerts traders of a potential impending upside breakout.
- In a Descending Triangle, strength from sellers causes price to reach roughly the same support level during each decline, but each advance within the triangle ceases at a slightly lower high than the one before it. This lack of upside strength as the pattern develops alerts traders of a potential impending downside breakout.
3. This formation of shorter and smaller moves continues like a coil until price finally springs out of the pattern, breaking either support or resistance in the process. Along the way volume will typically decline as price moves towards the apex prior to the ultimate price breakout.
Once a break of resistance or support occurs, a surge in volume is expected. If there isn’t a strong increase in volume the move may be unsustainable with price ultimately failing to follow through in any meaningful way in the direction of the breakout.
Many traders utilize triangle patterns as part of their trading analysis. It’s important to remember that any price pattern can fail to follow through as anticipated. Still, the distinctive and easy to recognize nature of the triangle pattern, as well as its propensity to highlight impending price movements, make it a potentially very useful tool. As price reaches the apex of an unfolding triangle pattern, traders should watch closely for a breakout from the formation and looking for an increase in trading volume as confirmation that a meaningful breakout move may be starting to unfold.