Symmetrical Triangle

The triangle pattern, also called the “coil,” appears in three varieties:

  • symmetrical,
  • ascending and,
  • Descending.

Generally, a triangle pattern is considered a continuation or solidification pattern.

However, sometimes, the formation indicates a reversal of a trend.

Symmetrical triangles are generally viewed neutral, ascending triangles are bullish, and descending triangles are bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Rarely a triangle will last longer than three months. If a triangle pattern does take longer than three months to complete, that means the formation will take on a major effect on the trend.

What does a symmetrical triangle look like?

Converging trend lines of support and resistance give the triangle pattern its unique shape. This happens because the trading performance gets stronger and tighter until the market breaks out with great intensity.

Buyers and sellers then are in a period where they are not sure where the market is directed. Their uncertainty is identified by their actions of buying and selling very quickly. That makes the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trend lines meet at the “apex,” established at the right of the chart. The “base” of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

Symmetrical Triangle

 

A symmetrical triangle shows two converging trendlines, one is ascending, the other is descending. They are creating a sideways symmetrical triangle. The formation happens because prices are making both lower highs and higher lows.

The pattern should display two highs and two lows. All of them are touching the trendline as a minimum of four reversal points is necessary to draw the two converging trendlines. As you can see, this graph above has these points.

We can divide symmetrical triangles into two groups:

1. symmetrical bottoms – prices trend down then form lower highs and higher lows. The breakout can be either downward or upward.

2. symmetrical tops – prices trend up then form lower highs and higher lows. The breakout can be either downward or upward.

Why is the symmetrical triangle pattern important?

A symmetrical triangle pattern is almost easy to identify. In addition, triangle patterns can be quite reliable to trade with very low failure rates. There is a caution concerning trading these patterns, however. As mentioned previously, a triangle pattern can be either continuation or reversal patterns. Typically, they are continuation patterns. To reach the reliability for which the triangle is well known, technical analysts advise waiting for a clear breakout of one of the trendlines defining the triangle

Triangle patterns are usually sensitive to correct and trustworthy analysis, with the requirement that the investor must wait for a stable breakout. It is opposed to a premature. In general, the failure rate for triangles drops significantly if the investor waits for a valid breakout and, once that breakout happens, the pattern proves strongly stable.

Experts advise that a minimum entrance criterion would be a closing price outside the trendline and not just an intraday entrance.

Is the volume important in a symmetrical triangle pattern?

Volume is an important factor to consider when determining whether a formation is a true triangle. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about whether the pattern is a true triangle.

Let’s say, this traditional volume pattern happens because of investor sentiment during the creation of a triangle.

Investors are skeptical. Their dilemma means that they are buying and selling earlier. That turns into a narrowing of the highs and lows, creating the “coil” shape, indicative of the triangle. Because investors are skeptical, many are holding on to their stocks, awaiting the market’s next move. When breakout finally occurs, there’s a wave in market activity because investors are finally convinced enough about the direction of the market to release their suppressed supply or demand.

The details that you should pay attention to in a symmetrical triangle pattern

1. The occurrence of a Breakout – Technical analysts pay close attention to how long the triangle takes to develop to its peak. The general rule is that prices should break out – clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The breakout, in other words, should occur well before the pattern reaches the apex of the triangle.

To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the peak. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution. If prices don’t make breakout of the trendlines before that point, the triangle begins to lose its potency and prices will simply drift out beyond the apex with no surge in either direction.

2. Price Action – Unlike ascending and descending triangles which give advance notice of their intentions, the symmetrical triangle tends to be a neutral pattern. The symmetrical triangle is generally a stabilization pattern. This means an investor can look to see the direction of the previous trend and make the basic assumption that the trend will continue. However, many experts advise investors that, because the breakout direction could go either way, they wait until the breakout occurs before investing in or selling the stock.

In essence, a symmetrical triangle is a picture of hesitation.

3. Measuring the Triangle – To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation.

To calculate the minimum price goal, calculate the height of the formation at its widest part, the base of the triangle. Measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the peak of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the peak price if the triangle experiences a downside breakout.

For example, working with a symmetrical triangle, assume the highest high of the pattern occurs at 150 and the lowest low at 100. The height of the pattern is 50 (150 – 100 = 50). The peak of the triangle occurs at 125. The pattern has an upside breakout. Using the measuring rule, the target price is 175 (125 + 50 = 175).

4. Duration of the Triangle – The triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications – Once breakout occurs, the symmetrical triangle tends to be a reliable pattern. The failure rates are ranging between 2% and 6% for symmetrical triangles after a valid breakout.

6. The shape of the Symmetrical Triangle – The pattern should display two highs and two lows, all touching the trendline. Meaning, a minimum of four reversal points is necessary to draw the two converging trendlines.

7. Volume – Investors should see volume decreasing as the pattern progresses toward the peak of the triangle.

At breakout, however, there should be a noticeable increase in volume. Like reversal patterns, the volume is more important on the upside than the downside. Therefore, an investor will be particularly interested in seeing an increase in volume on breakout if the pattern is moving upwards.

8. Premature or False Breakouts – We can call them premature false breakouts or false moves. The triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so tiny as the triangle formation progresses to the peak, it takes very little activity to bring about an inconsistent and incorrect movement in price, taking the price outside of the trendlines.

To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout is a valid one. Typically, a false move corrects itself within a week or so. A key sign of a possible false move is low volume. If there’s no pick up in volume around the breakout, investors should be wary.

Typically, a good breakout from a triangle formation will be accompanied by a definite surge in volume.

There are situations, however, where a false move will occur with high volume. These are the most dangerous variety of false moves. The only advice experts can give to investors who fall prey to one of these false moves is to reverse their positions as soon as they become aware of the true movement of the stock.

How can you trade this pattern?

Different trading strategies depending on whether you already have a position in the stock or whether you do not have a position in a stock experiencing a triangle formation. If an investor already has a position in a stock, he or she may be “locked” into that position as the formation takes shape because it is not possible to definitively predict which way the breakout will take the price of the stock.  The key is waiting and watching for a valid breakout before making an investment decision.

If an investor does not have a position in a stock, staying away from the stock when it’s in the process of forming the triangle pattern is a good choice. Consider a position when a dependable breakout has occurred.

Symmetrical Triangle breakout

After such a breakout, if on the upside, you should buy on the next reaction if the major trend is up. If it is on the downside, sell short on the next rally if the major trend is down

This pattern has a tendency to premature breakouts and false moves. To avoid mistaking a false move for a valid breakout, experts advise waiting a few days to see if the breakout is reliable.

Because premature breakouts (where prices close outside of the trendline) are so common, don’t dismiss the pattern if it has experienced such a breakout. Premature breakouts do not predict the final breakout direction or success or failure of the formation.

Be wary of breakouts from triangles where the breakout does not occur until the peak of the triangle. Experts maintain that the most reliable breakouts occur about two-thirds of the way along the triangle.

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