We obviously all know what triangles are and what they look like. However, those that are just getting their feet wet in the fast-paced world of technical analysis may not realize that triangles can play a key role in helping them decipher the action on a chart. They can indeed, and savvy investors can use the geometric shape to pinpoint the things that can maximize profits and minimize losses.
What are Triangle Patterns on a Chart?
As the name obviously implies, triangle patterns are patterns that form the shape of a triangle on a sheet. These three-lined geometric shapes just aren’t created through happenstance, either. Basically, the build of these “triangles” derive from the convergence of two trendlines, with the stock’s price moving between the two lines. These two lines can be any combination of flat, ascending, or descending.
Because there are three different line types that can be used to shape a triangle, it stands to reason that there would be three different types of triangles that can be utilized. Each of these triangles differ in their build and their significance. The first triangle is a symmetrical triangle, the second triangle is a descending triangle, and the third triangles is an ascending triangle.
A Look at the Symmetrical Triangle
The symmetrical triangle is generally thought to be a continuation pattern that can tip an investor off to a period of trend consolidation followed by the resumption of a prior trend. It’s built by the meeting of an ascending support line and a descending resistance line. The two lines in this triangle formation should have a similar slope that connects at the triangle’s apex. When these lines are “drawn” investors will see the stock price bounces between the two trendlines as it heads toward the apex, and typically breaks out in the direction congruent to the prior trend.
If the preceding trend was a downward trend, the investor’s focus should be trained to look for a break below the ascending support line. If it’s preceded by an upward trend, the investor should look for a break above the descending resistance line. With that being said, it should be noted that this pattern does not always lead to a continuation of the prior trend. If a break going opposite of the previous trend happens, it signals the formation of a new trend.
When a breakout does happen, it’s wise for the investor to take a look for a jump in volume in the direction of the breakout. If there’s no corresponding high volume to add validity to the trend, it may be a sign of trend weakness. Also, the pattern is suspect to a return to the previous line of resistance or support that it just went past; savvy investors will keep an eye out for this level to make sure it holds if the pattern does break out.
Ascending Triangles at a Glance
An ascending triangle pattern is considered to be a bullish pattern. This means that the patter will give an indication that the stock price is headed upward once the triangle pattern is complete. This particular pattern is formed by a flat trendline which is a point of resistance, and an ascending trendline that serves as a price support.
The stock price will move between these two trendlines until it breaks out to the triangle’s upside. Typically, the pattern will be preceded by an upward trend; this makes it a continuation pattern. However, it can also be found in the event of a downtrend.
The completion of the pattern happens when the line breaks past the resistance level. However, it can fall below the support line, which breaks the pattern in a different way. Because of this, it’s important that you proceed with caution if you’re entering before a breakout occurs.
A Look at the Descending Angle
As one may guess, the descending angel pattern is the opposite of the ascending triangle. The reason for this is because of the signal it sends to investors. This signal is definitely bearish, and it suggests the price will trend downward once the pattern is complete. This particular triangle is built with a flat support line and a downward-sloping resistance line. This pattern is typically considered to be a continuation pattern, and it’s preceded by a downward trendline. With that said, it is possible to find it in an uptrend, much like how it’s possible to detect a downtrend in an ascending angle.
A Trend is Not a Wedge
It’s possible for an investor new to the world of technical analysis may spot something that looks like a triangle pattern and treat it as such. However, it’s important that they give the triangles proper scrutiny to make sure they aren’t inadvertently looking at a wedge.
Wedges look similar to a symmetrical triangle, because they contain two trendlines that bind a stock. However, there are two main difference between a wedge pattern and a triangle pattern. Firstly, the wedge is considered to be more of a long-term pattern; one that typically lasts three to six months. Secondly, they have converging trendlines that slant in either a downward or upward direction. This latter component is different than triangles, which tend to have more uniform triangles.
The fresh-faced investor can misconstrue the wedge for a triangle pattern if they’re not careful. This is why it’s important to make sure that the triangle they’re seeing is, in fact, a triangle. If they don’t, they could end up with an unpleasant surprise on their hands – or, more to the point, in their wallets.
Turning Triangles into Dollar Signs
In the world of technical analytics, triangles are far more than mere geometric shapes. They’re key components that can be used to help the risks low, and the probably for profitability high. They look easy to read, but they can be deceptively hard if you’re not keenly aware of some of the movements the pattern can make once it enters a breakout period. Nonetheless, if you master its quirks, you could find yourself using these patterns frequently as you angle for some extra dough.