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Lesson 11: Triangle Patterns

Lesson 11: Triangle Patterns

It is not as easy to spot Triangle patterns one would think because there needs to be a confirmation with a break below support or above resistance.

There are several different types of triangles which can all be very effective for your trading. One advantage is that there is no bias to either the long or short side, and this makes them very useful from the perspective of a CFD trader. Keep in mind that if you are always biasing yourself to the long side of the market, then you could be missing out on some of the most attractive features of this pattern.

How to use this guide

To get the most out of this guide, it’s recommended to practice putting these triangle trading strategies into action. The best risk-free way to test these strategies is with a demo account, which gives you access to our trading platform and $10,000 in virtual funds for you to practice with. Get your free demo account.

Once you’ve found a strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge.

What is a Triangle Pattern

A triangle in trading is a consolidation chart pattern that occurs mid-trend and usually signals a continuation of the existing trend. The triangle pattern is formed by drawing two converging trendlines as the price temporarily moves in a sideways direction.

These patterns can serve as reversal or continuation patterns. What they share in common is that the price range converges into a narrower range until the price breaks out either in the direction of the trend (continuation) or in the opposite direction (reversal). The price action needs to move in a series of lower highs and higher lows in order to be able to define a triangle.

What is a Triangle Pattern
Source: CAPEX.com

A triangle shows a decrease in volatility, that could eventually expand again. This provides analytical insight into current conditions, and what type of conditions may be forthcoming. The triangle pattern also provides trading opportunities, both as it is forming and once it completes.

Traders often look for a subsequent breakout, in the direction of the preceding trend, as a signal to enter a trade.

Like Japanese candlestick patterns, Western chart patterns are indicators and forms of support and resistance lines.

Western chart patterns are commonly classified as reversal or continuation patterns, but these are rough generalizations that help us organize these patterns in our minds. Reversal patterns are often not followed by trend reversals, and continuation patterns are often followed by breakouts up or down.

Along with cup and handle, head and shoulders, double/triple top and bottom, rising and falling wedges, flags, triangles are one of the most widely followed Western chart patterns.

As with candlestick patterns, you’ll have a much easier time remembering what these patterns mean if you understand the logic behind them.

Types of triangle patterns

Triangle patterns can form in one of several different ways:

  • The 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 consolidation. 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:

  • A security’s price reaches a point in its trend when it loses strength and reverses.
  • 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, the 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 the 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 triangle pattern develops alerts traders of a potential impending upside breakout.

Ascending Triangle
Source: CAPEX.com

In a Descending Triangle, strength from sellers causes the 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 triangle pattern develops alerts traders of a potential impending downside breakout.

Source: CAPEX.com

  • 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, the volume will typically decline as the 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 the price ultimately failing to follow through in any meaningful way in the direction of the breakout.

How to trade the Triangle pattern

There are two ways to trade using the triangle patterns: after a breakout or anticipating the breakout in the direction of the trend. Before you do either however, it is important to confirm the signal with other technical indicators such as the moving averages, Bollinger Bands or momentum indicators like the relative strength index (RSI) or the parabolic SAR.

When you see the ascending triangle, descending triangle or symmetrical triangle patterns and you want to place a trade, you can do so via derivatives such as CFDs. Derivatives enable you to trade rising as well as declining prices. So, depending on what you think will happen with the asset’s price when one of the triangle patterns appears, you can open a long position or a short position.

Follow these steps to trade when you see the triangle patterns:

  • Trading any type of chart patterns requires patience and the ability to wait for confirmation. The appearance of one of these patterns alerts traders of a price reversal, but until that occurs, most traders leave the pattern alone.
  • To get started trading triangle patterns, open an account. Choose between a live account to trade CFDs straight away or practice first on our demo account with virtual funds.
  • Choose your financial instrument. Triangle patterns can be spotted in most financial markets, especially those that are more volatile, such as forex, cryptocurrencies, and stocks.
  • Explore our online trading platform. We offer a wide range of technical indicators used to filter and confirm triangle patterns, as well as providing a range of order execution tools for fast trading, which in turn helps you to manage risk.

The below strategies for trading triangle patterns are merely guidance and cannot be relied on for profit.

Triangle Breakout Strategy

The breakout strategy can be used on all triangle types. The execution is the same regardless of whether the triangle pattern is ascending, descending, or symmetrical.

The breakout strategy is to go long when the price of an asset moves above the upper trendline or to go short when the price of an asset drops below the lower trendline of the triangle.

Since each trader may draw their trendlines slightly differently, the exact entry point may vary from trader to trader. To help isolate when the price is actually breaking out of the formation, increases in volume can help highlight when the price is starting to gain momentum in the breakout direction.

The objective of the triangle breakout strategy is to capture profit as the price moves away from the consolidation pattern.

Triangle Breakout Strategy
Source: CAPEX.com

If the price breaks below triangle support (lower trendline), then a short trade is initiated with a stop-loss order placed above a recent swing high, or just above triangle resistance (upper trendline).

If the price breaks above triangle resistance (upper trendline), then a long trade is initiated with a stop-loss order placed below a recent swing low, or just below triangle support (lower trendline).

To exit a profitable trade, consider using a profit target. A profit target is an offsetting order placed at a pre-determined price. One option is to place a profit target at a price that will capture a price move equal to the entire height of the triangle. For example, if the triangle was 100 pips in height at its thickest point (left side), then place a profit target of 100 pips above the breakout point if long, or 100 pips below the breakout point if short.

Profit targets are the simplest approach for exiting a profitable trade since the trader does nothing once the trade is underway. Eventually, the price will reach either the stop loss or profit target. The problem is that sometimes the trade may show a nice profit, but not reach the profit target. Traders may wish to add additional criteria to their exit plan, such as exiting a trade if the price starts trending against the position.

Anticipation Strategy

A more advanced form of this strategy is to anticipate that the triangle will hold or to anticipate the eventual breakout direction. By assuming the triangle will hold, and anticipating the future triangle breakout direction, traders can often find trades with very big reward potential relative to the risk.

It works like this: assume a triangle forms and a trader believes that the price will eventually break out of it to the upside. In this case, they can buy near triangle support, instead of waiting for the breakout. By buying near the bottom of the triangle the trader gets a much better price. With a stop loss placed just below the triangle risk on the trade is kept small. If the price does breakout to the upside the same target method can be used as in the triangle breakout method discussed above. Because of the lower entry point, the trader that anticipates stands to make much more than the trader who waited for the breakout.

Triangle Trading Strategy
Source: CAPEX.com

If a trader thinks the price will eventually break below the triangle, then they can short sell near resistance and place a stop loss just above the triangle. By going short near the top of the triangle the trader gets a much better price than if they waited for the downside breakout.

To use the "anticipation strategy" a triangle needs to touch support and/or resistance at least three times. This is because it is on the third (or later) touch of support/resistance that the trader can take a trade. The first two price swings are only used to actually draw the triangle. Therefore, to establish the potential support and resistance levels, and take a trade at one of them, the price must touch the level at least three times.

False Breakouts

False breakouts are the main problem traders face more often when trading triangles, or any other chart pattern. A false breakout is when the price moves out of the triangle, signaling a breakout, but then reverses course and may even break out the other side of the triangle.

False breakouts are a part of trading and can result in losing trades. Don't be discouraged. Not all breakouts will be false, and false breakouts can actually help traders take trades based on the anticipation strategy. If you aren't in a trade and the price makes a false breakout in the opposite direction we were expecting, that is a powerful signal to enter the trade!

A stop loss could be placed just below the recent low. Since the move to the downside failed, it is quite likely that the price will try to go higher, in line with the original expectation.

Some traders choose to wait until the price has moved twice the average true range (ATR) outside of the pattern. None of these methods will guarantee that you won't suffer false breakouts.

Position Size and Risk Management

Always utilize a stop loss. Even if the price starts moving in your favor, it could reverse course at any time. Having a stop loss means risk is controlled. The trader exits the trade with a minimal loss if the asset doesn't progress in the expected direction.

Having a stop loss also allows a trader to select the ideal position size.

To calculate it, determine how much you are willing to risk on one trade. Professional traders typically risk 2% (or less) of their account balance on any one trade. Calculate 2% of your account, as a dollar amount. For example, if your trading account is $2,000, you can risk up to $40 per trade.

Once you know this, take the difference between your entry and stop-loss prices. For example, if your entry point is $1.2030 and your stop-loss is $1.1990, then your risk is 40 pips. To calculate how many lots you can take on your trade, equal the risk in cash with the risk in pips. In forex trading, you have to know how much is 1 pip for any account currency and currency pair. In most cases, you can take a position size up to 0.1 lots of 1 mini lot.

This is the maximum position you can take to keep your risk on the trade limited to 2% of your account balance. Make sure there is an adequate volume in the market to absorb the position size you use. If you take a position size that is too big for the market you are trading, you run the risk of getting slippage on your entry and stop loss.

Final Word on Triangle Patterns

Knowing how to interpret and trade triangles is a good skill to have for when these types of patterns do occur. They are common, but won't occur every day in all assets. Day traders and swing traders will typically require a broader range of techniques than simply trading triangles. The concepts discussed here can be used to trade other chart patterns as well, such as rising and falling wedges, flag and pennant, range markets, and channels.

  • Always be cognizant of the direction of the trend prior to the consolidation period.
  • Make use of upper and lower trendlines to help identity which triangle pattern is being formed.
  • Use the measuring technique discussed above to forecast appropriate target levels
  • Adhere to sound risk management practices to mitigate the risk of a false breakout and ensure a positive risk-to-reward ratio is maintained on all trades.

Free trading tools and resources

Remember, you should have some trading experience and knowledge before you decide to trade chart patterns. You should consider using the educational resources we offer likeCAPEX Academyor ademo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.

Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

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