Triangles are a popular chart pattern because they are relatively easy to spot and offer well defined entry points, stops and profit targets. The profit target is usually two or three times more than the risk (but not always), thus providing an attractive reward-to-risk ratio. Over the last several months, these four stocks have seen price action that has been continually compressed. Like a spring, the price eventually breaks out of the tightening pattern providing a trading opportunity.

Royal Caribbean Cruises Ltd. (RCL) has been moving within a triangle pattern since the start of June. Each high point since June has been at a slightly different price, so using $57.50 as the breakout point eliminates some of the probability for a false breakout. If the breakout occurs, the upside target is $61.30 with a stop near $54 (below triangle). There is also a wedge pattern in play since April. Wedges are often reversal patterns, so a drop below $54 would break both the triangle and wedge pattern to the downside. Stops could be placed just above $57 with a target $50. The risk-to-reward is favorable for the trade, but not ideal. To lower the risk of the trade, a more conservative approach would be using a tighter stop: placing a stop about half way inside the pattern. This usually gives the trade more than enough room while reducing the risk of the price moving against you.

RCL triangle

Wyndham Worldwide Corporation (WYN) was in a choppy triangle pattern since the beginning of 2014, and in July it broke to the upside. The price is still relatively close to the breakout point of $75. The target for the breakout is $88 to $90, and a stop can be placed below $73. A drop back below $72 - which is less likely at this point - would mean the upside breakout was false. Unable to go higher, the downside target would be $64. A stop could be placed above $75 on the short trade should that scenario develop.

WYN choppy triangle

Sears Holdings Corporation (SHLD) has been in a triangle pattern since it gapped down strongly in April. This stock is considerably volatile, seeing 50% moves in a matter of months, and sometimes weeks. A rally above $42.60 can be used as an upside breakout entry level. A stop goes below $38 and a target at $55. A drop below $37.60 breaks the pattern to the down side; place a stop above $42 and a target at $25.50.

SHLD triangle

First Niagara Financial Group Inc. (FNFG) is consolidating after a large drop in January. This is not a perfect triangle pattern - the highs and lows don't all line up with the trend lines - but the consolidating and tightening pattern can still be seen. This means some estimating must be done in order to determine an optimal entry point. A move above $9 provides enough evidence that a break is occurring. The target is $10.35 and a stop can be placed near $8.50. On the other hand, a drop below $8.50 would take out the June low and potentially signal a continuation of the overall downtrend. Downside target is $7.10 with a stop above $8.90.

FNFG triangle

The Bottom Line

Triangles typically provide a good reward to risk ratio, as well as defined entry points, stops and targets. To attain the estimated target, measure the height of the triangle at the widest point, and then add or subtract that from the breakout point (upside or downside breakout respectively). If the reward to risk isn't as favorable as desired, the stop can be reduced and placed near the center of the pattern instead of on the opposite side. Triangles won't always be perfect - often the prior highs or lows won't line up exactly with the trendlines. That is ok, as long as we can see the price is consolidating, helping us determine an optimal entry point. Keep in mind all strategies carry risk of loss. Only risk a small percentage of account capital on any single trade.

Related Articles
  1. Active Trading Fundamentals

    Triangles: A Short Study In Continuation Patterns

    Learn how to read these formations of horizontal trading patterns.
  2. Charts & Patterns

    Continuation Patterns: In-Depth Look At Triangles

    We take a closer look at ascending and descending triangles to help traders predict the ultimate breakout direction.
  3. Charts & Patterns

    Continuation Patterns: Introduction To Triangles

    The three types of triangle continuation patterns look different, yet provide similar information. Find out how.
  4. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  5. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  6. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  7. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  8. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  9. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  10. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
RELATED TERMS
  1. Breakeven Price

    1. The amount of money for which an asset must be sold to cover ...
  2. Triangle

    A technical analysis pattern created by drawing trendlines along ...
  3. Descending Triangle

    A bearish chart pattern used in technical analysis that is created ...
  4. Breakout Trader

    A type of trader who uses technical analysis to find potential ...
  5. Symmetrical Triangle

    A chart pattern used in technical analysis that is easily recognized ...
  6. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!