There are three types of triangles: symmetric, ascending and descending. For trading purposes, these formations are similar when you look at the information they provide to the trader, but how they appear on the charts is different.
TUTORIAL: Analyzing Chart Patterns: Triangles
Symmetric, ascending and descending triangles are classified as continuation patterns. There is also another triangle, called a broadening triangle; it differs in that the price range is expanding as opposed to narrowing, which is what we find in the three other triangles. This broadening price action makes the pattern difficult to trade, as the continually larger moves within the formation eat into the gains that may occur from a breakout. Broadening triangles are rare and often occur at reversal points, and are therefore not classified as continuation patterns. (For related reading, see Support And Resistance Reversals.)
Continuation triangle patterns require that the trader be able to see, measure and, thus, be able to trade off the pattern. In order to do all of these things, lines will need to drawn on the chart to isolate the triangle(s) from the other price data. A triangle will have two lines: One is considered the resistance (or supply) line, and will run along the price highs of the formation. The other is a support line (or demand) line and will run along the price lows of the formation.
In order to draw these lines, the trader will need at least two reversal points on the high side and two reversal points on the low side. As Figure 1 shows, after we have two price highs and two price lows, the lines are drawn to connect the two (or more) high points and two (or more) low points. For instance, on the price highs, the trader would draw a line connecting the price high at point one, to the price high at point two and then continue to extend the line out to the right.
Once these lines have been drawn, the lines may continue to provide support, as exemplified in Figure 1. Price action continues to unfold within the pattern, and the lines drawn can often be accurate in pointing out future reversal points, within the triangle.
|Figure 1: TriCo Bancshares (TCBK) – Symmetric Triangle, Daily Chart|
It should be noted, this type of accuracy may not always occur. The line may be slightly penetrated, the price may not quite reach the support or resistance line, or price may completely break the line, indicating a breakout. If the price moves outside the bounds of the pattern in a definitive manner, it is called a "breakout." (For related reading on breakouts, see The Anatomy Of Trading Breakouts.)
If the line(s) is slightly penetrated, the trader can redraw the line(s) so the new lows and highs are enclosed within the drawing of the pattern.
Figure 1 is a symmetric triangle, meaning lower price highs and higher price lows are occurring, this causes a converging of the price action into a narrower and narrower range; the lines slope towards each other. An ascending triangle differs in that the resistance line in an ascending triangle is not sloping, but horizontal. The support and resistance will still require two price swings respectively, to draw the lines.
In Figure 2 the first two swing highs reach very close to the same price, this creates a horizontal line along the top of the formation, which will extend out to the right. Along the price lows two reversal points are marked, these points are connected by a line and extended to the right; this creates the "ascending" line from which the pattern derives its name. (For related reading, see Introduction To Technical Analysis Price Patterns.)
|Figure 2: Roper Industries (ROP) – Ascending Triangle, Daily Chart|
A descending triangle is drawn in a similar fashion to the former two patterns. The only difference is that the resistance line is downward sloping, or "descending." The support line is horizontal, as the price lows have reached similar levels. Figure 3 shows an intra-day descending triangle. The pattern can be drawn as soon as there are two swing highs and two swing lows in price, the lines are then extended to the right to help gauge future price action. (For related reading on triangles, see Triangles: A Short Study In Continuation Patterns.)
|Figure 3: Best Buy (BBY) – Descending Triangle, 15 Minute Chart|
Triangles can occur in any time frame, from tick charts right up to daily, weekly or monthly charts. Therefore traders can look on all times frames for triangle formations of varying degrees. For instance, there may be a triangle on the 15 minute time frame, which is inside a larger triangle found on daily chart data. By finding multiple patterns and drawing them on the chart, the trader can better identify likely areas of strong support and resistance.
The Bottom Line
There are three types of triangles which fit under the heading of "continuation patterns"; these include symmetric, ascending and descending. There is also a broadening triangle that is not considered a continuation pattern. All triangles require a support and resistance line; resistance and support lines require two price highs and two price lows, respectively, in order to be drawn. The resistance line connects the two highs and extends to the right; the support line connects the two lows and also extends to the right. (For related reading on support and resistance, see Interpreting Support And Resistance Zones.)