What is a Triangle
A triangle is a technical chart pattern created by drawing trendlines along a converging price range. Variations of a triangle include ascending, descending and symmetrical triangles. Triangles are similar to wedges and pennants and can be powerful continuation or reversal patterns.
Technical analysts see a breakout of a triangular pattern as either bullish or bearish.
BREAKING DOWN Triangle
Triangle patterns are aptly named because the upper and lower trendlines ultimately meet at the apex on the right side, forming a corner. Connecting the start of the upper trendline to the beginning of the lower trendline then completes the other two corners to complete the triangle. The upper trendline is formed by connecting the highs, while the lower trendline is formed by connecting the lows. One of three potential triangles can develop as the price nears the apex.
An ascending triangle is a breakout pattern that forms when the price breaches the upper horizontal trendline with rising volume. The upper trendline must be horizontal, indicating nearly identical highs, which form a resistance level. The lower trendline is rising diagonally, indicating higher lows as buyers patiently step up their bids. Eventually, the buyers lose patience and rush into the security above the resistance price, which triggers more buying as the uptrend resumes. The upper trendline, which was formerly a resistance level, now becomes support.
A descending triangle is an inverted version of the ascending triangle and considered a breakdown pattern. The lower trendline should be horizontal, connecting near identical lows. The upper trendline declines diagonally toward the apex. The breakdown occurs when the price collapses through the lower horizontal trendline support as a downtrend resumes. The lower trendline, which was support, now becomes resistance.
A symmetrical triangle is composed of a diagonal falling upper trendline and a diagonally rising lower trendline. As the price moves toward the apex, it will inevitably breach the upper trendline for a breakout and uptrend on rising prices or breach the lower trendline forming a breakdown and downtrend with falling prices.
Traders should watch for a volume spike and at least two closes beyond the trendline to confirm the break is valid and not a head fake. Symmetrical triangles tend to be continuation break patterns, meaning that they tend to break in the direction of the initial move before the triangle formed. For example, if an uptrend precedes a symmetrical triangle, traders would expect the price to break to the upside.
(To learn more about other chart patterns, see: Technical Analysis: Chart Patterns.)