In part 1 of this series we introduce triangles, and here we continue that study by taking a closer look. Triangles appear in the following forms: ascending, descending and symmetrical (there is also a fourth category called the "expanding triangle"). The symmetrical triangle is best described as a continuation pattern, a formation that represents a slowdown or consolidation in a trend – whether an up or downtrend. Triangles are sideways trading actions, and the widest part of the correction occurs earliest in the development of the pattern. As the market continues in its sideways or horizontal pattern, the trading range narrows, forming the shape of a triangle.

In the formation of a triangle, there are two trendlines to draw. The upper trendline, which is referred to as the supply line, represents resistance. The supply line represents a lack of conviction by the buyers to commit more funds to the market in a particular issue, and because of that, there is enough profit-taking and short selling to turn prices back down. The lower trendline, however, is the demand line and represents support. In this situation, it is the buyers that come back to the party and drive the prices northward one more time.

There must be four reversal points in order for a triangle to be recognized, but one may also see as many as six reversal points (three peaks and three troughs). In John J. Murphy's text "Technical Analysis of the Financial Markets," he describes the time limit for the resolution of a triangle:

"There is a time limit for the resolution of the pattern, and that is the point where the two lines meet-at the apex. As a general rule, prices should break out in the direction of the prior trend somewhere between two-third and three-quarters of the horizontal width of the triangle. That is, the distance from the vertical base on the left of the pattern to the apex at the far right. Because the two lines must meet at some point, the time distance can be measured once the two converging lines are drawn. An upside breakout is signaled be a penetration of the upper trendline. If the prices remain within the triangle beyond the three-quarter point, the triangle begins to lose its potency, and usually means that prices will continue to drift out to the apex and beyond."
Chart Created with Tradestation

The chart shows Sun Microsystems and a very clear triangle. In the first week of October 2001, the market formed an isolated high. The market declined and formed an isolated low during the second week. Then, the market advanced and formed the second isolated high in the third week of October, at which time we drew the supply or resistance line. Three days later, the market traced out the final isolated low, and we drew the demand or support line. At this point, we anticipated the breakout to the upside because this stock was still in an uptrend based on an eight-week moving average. Then, on October 28, there was a gap up at the open and the stock took off. The perfect entry point was a penetration of the supply line, with a stop-loss point below the demand line.

Finally, you should use triangles to identify consolidation periods for strong market leaders that are in well-defined uptrends; watch how triangles or other continuation patterns are unfolding. As long as you can see the patterns acting as continuation patterns, the overall health of the market is strong. Failures by continuation patterns can forewarn of a more substantial market correction on the horizon.

In part 3 we continue our in-depth look at triangles, and in part 4 we look at flags and pennants.

Related Articles
  1. Active Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
  2. Active Trading Fundamentals

    Identifying Market Trends

    The success or failure of your long- and short-term investing depends on recognizing the direction of the market.
  3. Forex Education

    Technical Analysis Works In Forex Markets

    Technical analysis is a hotly debated topic. Discover evidence showing that it works in forex markets.
  4. Active Trading Fundamentals

    Weighted Moving Averages: The Basics

    We take a closer look at the linearly weighted moving average and the exponentially smoothed moving average.
  5. Trading Strategies

    Find Turning Points With Single-Day Patterns

    On their own, single-day patterns can be unreliable, but that doesn't mean they can't be used effectively.
  6. Charts & Patterns

    A Look At Kagi Charts

    This relatively unknown tool could help you find an asset's trend faster.
  7. Chart Advisor

    ChartAdvisor for September 4 2015

    Weekly technical summary of the major U.S. indexes.
  8. Trading Strategies

    Only Take a Trade If It Passes This 5-Step Test

    Not every moment is a good trading opportunity. Put each trade through this five-step test, so you're trading only at the best profit potential times.
  9. Forex Strategies

    Two Great Currencies To Profit From Oil Volatility

    U.S. dollar crosses with Canadian and Australian dollars offer easy access to crude oil trends due to their tight correlation with energy futures.
  10. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!