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If you are looking to trade a break out on an intraday chart, one pattern which is often quite useful and favoured by currency traders is the ascending or descending triangle.
One of the advantages of the triangle is that it’s easy to recognise (ask any 5 year old) and what’s more, easy to trade. Typically a triangle will form after prices have been trending for a while but then fail to break into new territory. It is during this consolidation that some idea can be gleaned as to which direction the market will ultimately break. Often you will find that the subsequent break out is in the same direction as the previous trend.
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Ascending triangles are generally considered bullish and are most reliable when found as an uptrend takes a pause. The top part of the triangle appears flat, while the bottom part (the hypotenuse) of the triangle has an upward slope.
In ascending triangles, the market becomes overbought and prices are turned back. Several attempts are made by the bulls to pierce the resistance cap, however they all fail. Simultaneously the bearish elements of the market fail to initiate a sell off and the swing lows are progressively higher. Prices eventually break through the old highs and are propelled even higher as new buying comes in allowing for quick profits, as students of the first few TradingKey sessions can attest.
To qualify as an ascending triangle and a continuation pattern:
- A trend must already exist
- The upper horizontal line must connect at least two daily highs
- The lower ascending trend line must have represented bullish support on at least 2 occasions. These reactive lows should be progressively higher
- As the pattern develops volume usually falls, before increasing dramatically as price breaks out
- A price target is formed by looking at the widest part of the triangle and projecting it upwards
A descending triangle pattern is illustrated below. The pattern is identical (although entirely inverse) to the ascending triangle.
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The descending triangle is generally considered to be bearish and is usually found in downtrends. Unlike the ascending triangle, this time the bottom part of the triangle appears flat, whilst the hypotenuse is sloping downwards.
Tentative buying comes in at the lows, and prices perk up. The higher price, however, attracts more sellers and prices re-test the old lows. Buyers then once again tentatively re-enter the market. The better prices though, once again attract even more selling. Sellers are now in control and push through the old lows of this pattern, while the previous buyers rush to dump their positions. To qualify as a descending triangle and a continuation pattern:
- A trend must already exist
- The lower horizontal line must connect at least two daily lows
- The upper descending trend line must have represented bearish resistance on at least 2 occasions. These reactive highs should be progressively lower
- As the pattern develops volume usually falls, before increasing dramatically as price breaks out
- A price target is formed by looking at the widest part of the triangle and projecting it downwards
If you can identify a triangle within a bigger picture pattern then you have a better chance of picking a solid trade. This pattern is used in conjunction with a Wave 3 and is taught as a very valuable additional trading trigger / confirmation pattern to students who attend the TradingKey course. It is well worth using to increase the probability of picking winning trades within an appropriate contextual environment.
Stay Sharp.
John Jeffery
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