Table of contents:
- 1 Within a triangle the market builds up energy
If you are interested in a trading approach that has been in use for more than a century, then you should think of triangular price patterns. A triangle is a chart technical formation that is created by mass psychology. And this is exactly why the formation will work well for the next hundred years.
A triangle is usually a trend continuation formation and there are three variants:
A triangle is very easy to recognize within a chart. Therefore it has a high effectiveness. Many market participants recognize triangles and act accordingly. The triangle therefore has a self-fulfilling function.
Some fast market participants want to take a market position before the triangle is complete. This does not make much sense, because the direction of the breakout must be confirmed. Triangles tend to break out incorrectly when they are formed. At the earliest after three quarters of the length, a triangle would be reasonably predictable.
Within a triangle the market builds up energy
In principle, every triangular shape is a consolidation phase. It therefore fits ideally into a trend. The price oscillates in the triangle from the top to the bottom. At the same time, the market becomes more and more calm.
Calmness is practically connected with the build-up of energy. At the end of the triangle, the price breaks out to the upper or lower side and picks up speed. After a breakout, the price must show a dynamic wave, otherwise something is wrong with the pattern. During the breakout movement, the trading volume should be above average.
As the market calms, the triangle also indicates volatility and trading volume. Both Volatility and Volume should decrease during the development of the triangle.
The breakout direction can be guessed.
- Mostly a descending triangle is to be valued bullish
- Most of the time an ascending triangle is to be evaluated bearish
- A symmetrical triangle leaves the future direction of movement open. If the symmetrical triangle appears in a trend, the symmetrical triangle tends to break out in the trend direction.
Tip: If the triangle takes a disproportionate amount of time to form, the informative value as a trend confirmation pattern decreases. The triangle takes on a life of its own and is no longer related to the trend.
In “clean” triangle trading, one should only open a position when the upper or lower trend line is broken. If the closing price is breached twice outside the triangle, the breakout is confirmed.
Both trend lines are signaling. This means, for example, if the price breaks down and then immediately reverses, and even then breaks through the upper trend line, then it is a hard reversal movement. The probability is then very high that the upward movement will continue.
The psychology behind a triangle
A triangle arises from a disagreement among market participants. The price swings back and forth in the triangle shape. Bulls and bears fight with each other. At the beginning, the game is relatively dynamic. At the beginning of the triangle formation, the average volume in a single price wave is higher. The volume tends to decrease as the development progresses. But it does not only concern the volume. The same applies to volatility. The market is ready for a breakout when a resting point has been reached. From the calm, the force of the breakout then arises. The longer the triangle and the calmer the market, the more violent the subsequent movement becomes.
A trader’s tip: Pay special attention to 5-part triangles
There is a “sworn” community among the traders. It’s the Elliottwaver. An analyst who works with Elliott waves believes in a fixed counting rhythm for the individual price waves. A very important price pattern of the Elliottwaver is the “Triangle”. As the English term suggests, this is a classic triangle. The Elliottwaver always starts from 5 small waves within the triangle. These are the correction waves a-b-c-d-e. Now that the last small wave has been completed, you can assume that the globally active Elliottwavers have now recognized the formation and, depending on the eruption direction, either go long or short. With this knowledge you have an advantage that you can take advantage of. Because of the Elliottwaver, the dynamics of the breakout wave must continue to increase, and thus the profit potential of your trade increases. The principle works well for indices, currencies and popular stocks.
Forecast of a triangle
A reliable prognosis of the direction of the outbreak is not very easy. Basically, after a breakout from a triangle, a dynamic movement should follow. In most cases, a triangle is left in the opposite direction. This means an ascending triangle would be bearish and a descending bullish.
However, the isolated view of the triangle is not practical. Basically, a triangle is a formation of the trend continuation. Therefore, the trend must always remain in focus. If a triangle forms in a trend, then the breakout will usually occur in the trend direction and the shape of the triangle fades into the background.
Statistical values for breakouts from triangles according to Thomas Bulkowski
- Descending triangles in an uptrend: 84% reach the price target
- Descending triangles in a downtrend: 61% reach the price target
- Ascending triangles in an uptrend: 75% reach the price target
- Ascending triangles in a downtrend: 63% reach the price target
- Symmetric triangles in an uptrend: 66% reach the price target
- Symmetric triangles in a downtrend: 57% reach the price target
How to determine the target price and stop price
Because the dynamics of the triangle can be surprisingly high, an accurate price forecast is not easy. However, there are certain probabilities. For example, the initial width of the triangle (maximum width) corresponds to the length of the minimum movement of the breakout wave. In a similar way, you can also set a stop price. After a breakout, the price should quickly continue its path. If it does not, then something is wrong. Because of this trading logic, you can set the stop price relatively close to your entry point. To do this, take the maximum width of the triangle and calculate 1/3 of it as the distance for the stop price.