Triangle Chart Pattern Trading Techniques

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Contributor, Benzinga
May 10, 2023

Correctly identifying and subsequently trading the triangle chart pattern has benefitted many technical forex traders. The triangle pattern is traditionally categorized as a continuation chart pattern, but it can also sometimes serve as a strong reversal indicator if it fails.

If you trade forex and want to learn more about technical analysis and classic chart patterns, then getting familiar with the triangle chart pattern types and how to profit from them would make sense. This easy-to-recognize set of chart patterns can help you discern when a directional market move is likely to continue after a consolidative pause so that you can position for the trend’s resumption. 

In this article, Benzinga explains how to recognize and analyze the various types of triangle chart patterns and how to use them as forex trading signals.    

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What is a Triangle Chart Pattern?

The various triangle chart patterns are popular technical analysis indicators used by traders of all types of assets and derivatives. As implied in its name, a triangle pattern looks like a triangle on an exchange rate chart because it is created by the convergence of two trendlines drawn between the highs and the lows of the pattern. 

The appearance of a triangle pattern usually suggests a temporary pause in the progress of the underlying trend before the exchange rate continues in the same direction. If a triangle pattern fails and instead breaks out in the unanticipated opposite direction to the prevailing trend, then that breakout can indicate a strong reversal in the underlying trend. 

Most triangle patterns develop during market consolidation phases during which trading conditions calm and volatility gets progressively lower. Expanding triangles are the exception because they can show the opposite characteristics of increasing volatility and more active trading conditions. 

Correctly identifying the various triangle chart patterns and subsequently trading off them has provided forex traders with many profitable trades over the years. The important differences between the different types of triangle patterns are covered in the following section. 

Types of Triangle Chart Patterns

Traditional technical analysis recognizes at least five different types of triangular chart patterns, with the ascending, symmetrical and descending triangle types predominating in the frequency with which they are observed and discussed. 

Those three main triangle patterns are illustrated in the image below along with their typical trade entry and stop loss levels. Profits are generally taken near the level determined by projecting the triangle’s initial width from the breakout point. 

image-2

The five types of triangle chart patterns are explained further below:

Ascending Triangle

This type of triangle shows a horizontal upper trendline located at a resistance level along with a support trendline sloping upwards. The upper trendline shows resistance with identical highs, while the lower trendline shows consistently higher lows. A breakout from this bullish chart pattern occurs when the exchange rate penetrates above its horizontal resistance level. The market should then continue rising until it has reached the initial width of the triangle projected upward from the pattern’s breakout point. 

Descending Triangle

Basically, the reverse of an ascending triangle, the descending triangle has a resistance level characterized by a downward-sloping line, while the support line forms horizontally. When the lower support level of this bearish pattern is breached, the preceding downward trend should continue. The market should then continue falling until it has reached the initial width of the triangle projected downward from the pattern’s breakout point. 

Symmetrical Triangle

This triangle type is characterized by converging upward and downward-sloping trendlines that have similar but opposite slopes. A symmetrical triangle is considered a neutral chart pattern, so traders need to wait for the breakout to happen before taking any position based on it. Once a breakout occurs, the market should then continue to move in the direction of the breakout until it has reached the initial width of the symmetrical triangle projected from its breakout level. 

Asymmetrical Triangle

This triangle pattern has converging upward and downward sloping trendlines that have different but opposite slopes. An asymmetrical triangle favors either the upside or the downside, depending on which trendline has the least steep slope. So, if the upper resistance trendline of the triangle is only mildly downward sloping, but its lower support line is rising quite steeply, then that has bullish implications for the pattern’s likely breakout direction. 

Expanding Triangle

An expanding triangle pattern is characterized by two trendlines that diverge in opposite directions to form a triangular shape with a wider market range seen as time progresses. The appearance of this pattern indicates substantial market volatility and indecision, as buyers and sellers are unsure about the trend’s direction and so engage in a tug-of-war.

How to Analyze Triangle Chart Patterns

Forex traders can typically identify triangle patterns on an exchange rate chart by looking for the converging upper and lower horizontal or sloping trendlines drawn between the pattern’s high and low points respectively. The upper trendline provides resistance, while the lower provides support.

Drawing two converging trend lines through the pattern’s upper resistance levels and lower support levels allows a triangle pattern and its type to be identified so that the pattern can be analyzed and a suitable trading plan can be formulated. 

To start the triangle analysis process, just draw the two trendlines on the chart to connect the highs and lows that occur within the triangle pattern as the market reverses. This lets you visually mark the limits of the converging range of the triangle. For converging triangles, you may even be able to anticipate the triangle’s breakout which needs to occur before the two lines meet. 

The height of the triangle pattern is just the absolute value of the difference between the first extreme exchange rate level seen in the triangle pattern and the second. This height is then used to obtain the breakout objective for the pattern by projecting it from the breakout point in the direction of the breakout. 

When Do Triangles Occur?

According to Elliott Wave Theory, triangles typically occur as fourth waves within a five-wave directional trend, and they usually unfold in a sequence of five overlapping waves before the market breaks out of the consolidation pattern and the trend resumes. 

Knowing this tendency lets you start to count the waves within the triangle as it evolves. This can in turn help you determine whether the next wave will be higher or lower and in which direction the pattern’s breakout will probably occur. 

When analyzing and identifying triangle chart patterns, additional information like the trading volume, nearby support or resistance levels, and the duration of the possible triangle pattern can be important factors to take into account. Traders can review such information to help them confirm that a triangle exists so they can start to work on a trading strategy to profit from their analysis. 

The first indicator many technical traders look at to confirm a triangle is the trading volume. This measures the total transaction amount observed in a given time period for the currency pair. While volume information is a bit difficult to obtain for the decentralized and largely over-the-counter forex market, some forex traders will use currency futures market trading volume or transaction data from online forex brokers to get a sense of the trading volume at different phases of the triangle pattern. 

Keep in mind that the trading volume will typically be fairly high going into a triangle pattern as the trend progresses to the triangle’s initial extreme point. The volume for all but the expanding triangle type will then tail off as the triangular consolidation phase progresses. Volume should again spike higher when the market eventually breaks out of the triangle pattern. 

With respect to their duration, authentic triangles tend to be longer-term chart patterns. They will often progress over a time frame of several weeks or even months until they ultimately break out.

Finally, triangle patterns tend to be more reliable in trending markets where the exchange rate is moving in a clear direction. Since triangle patterns may not be as accurate in choppy sideways markets, traders may need to use different methods to identify trading opportunities when such market conditions prevail.

How to Trade Triangle Chart Patterns

Trading a triangle chart pattern involves identifying the type of triangle pattern, determining the direction of the trend and then taking a trading position when a breakout occurs. Forex traders can take the following five steps when trading a triangle pattern:

Identify the Triangle Pattern

You can first look out for a triangular consolidation phase appearing on an exchange rate chart after a directional movement that is bounded by converging trendlines with opposite slopes.

Determine the Trend Direction

You can determine the direction of the trend by analyzing the exchange rate action visually and using technical trend indicators like moving averages. If the triangle is bullish, traders should look for a long position, while if the pattern is bearish, traders should look for a short position.

Set Trade Entry and Exit Points

Once a triangle breakout is seen and a position is taken in the direction of that breakout, most traders will put their protective stop-loss exit orders safely below the triangle’s broken trendline. Take-profit orders are typically set just ahead of the level determined by projecting the initial width of the triangle from the breakout point. With that noted, you should generally set the entry and exit points for trading a triangle pattern based on your trading strategy, risk management objectives and the expected movement of the currency pair in question. Some traders will also use nearby support and resistance levels to help set their entry and exit points, while others might just use the pattern’s broken trendline and its target level to set their trade entry and exit points. You can also use technical indicators like moving averages to confirm the trend direction and momentum indicators like the Relative Strength Index to confirm breakouts.

Manage Risk

You will generally want to have prudent risk and money management protocols integrated into your trading plan when trading the triangle pattern. Sizing your positions appropriately given your risk tolerance and using stop-loss orders to limit your risk on each trade is widely considered helpful to achieve long-term success trading in any financial market. The most important risk to avoid is depleting your account due to a bad trade, and you also want to strictly avoid trading with money you cannot afford to lose. 

Monitor Your Trades

Keeping track of your trades and having an exit strategy in place can save you considerably, especially if a trade goes against you. Watching the market alone does not suffice, however, since you should also be aware of economic news, the schedule of key economic data releases and any other pertinent news affecting either of the currencies in the pairs you’re trading. 

In essence, triangle pattern trading involves not just identifying that pattern and its type correctly but also evaluating the direction of the previous trend and managing your risk appropriately once a position is taken. 

Should You Use Triangle Patterns to Trade Forex?

Triangle patterns are among the most common classic chart patterns used by technical forex traders. If you prefer to trade forex using chart patterns, then this argues strongly for including triangle patterns in your trade plan along with prudent risk management techniques. 

While triangles can provide valuable information about potential market trends and give clear trade entry and exit points, you would probably want to avoid relying solely on triangle patterns to make your trading decisions since triangle patterns can sometimes fail as continuation patterns. 

You will also want to confirm each possible triangle you observe and its breakout with volume and momentum indicators. With that noted, even triangle pattern failures can present an opportunity for you to profit from the notable market reversals that such failures generally signal. 

Frequently Asked Questions 

Q

Is a triangle pattern bullish?

A

Some triangles are bullish patterns while others are bearish. Since triangles are typically continuation patterns, whether they are bullish or bearish will generally depend on what direction the market was moving in prior to the formation of the triangle.

Q

What is the success rate of the triangle chart pattern?

A

Triangle chart patterns are considered to have a moderate to high success rate, although the success rate of triangle chart patterns varies depending on factors that include the type of triangle pattern, the timeframe under analysis and market conditions.

Q

What chart pattern is the most popular?

A

Triangles, flags and pennants are among the best continuation chart patterns, while popular reversal patterns include double and triple tops and bottoms and head and shoulders tops and bottoms.

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About Jay and Julie Hawk

Jay and Julie Hawk are the married co-founders of TheFXperts, a provider of financial writing services particularly renowned for its coverage of forex-related topics. With over 40 years of collective trading expertise and more than 15 years of collaborative writing experience, the Hawks specialize in crafting insightful financial content on trading strategies, market analysis and online trading for a broad audience. While their prolific writing career includes seven books and contributions to numerous financial websites and newswires, much of their recent work was published at Benzinga.