Anyone trading Forex or any other financial markets for a while knows that trends don’t last long. In fact, the majority of a trader’s screen time is spent looking at a price chart where the currency pairs move up and down between a narrow range. However, during those few precious moments of a trending market, the price action often gives out hints about whether the trend will continue or reverse.
Being a signal for trend continuation or reversal, triangle patterns are often called bilateral pattern. However, the majority of the time, bilateral patterns end up breaking in the direction of the prevailing trend and that’s why most traders recognize these as continuation patterns.
What is the triangle pattern in Forex?
The Triangle pattern in forex trading is a time-sensitive chart pattern that shows a tightening range due to market indecisiveness. However, this pattern has to break out eventually, and if that occurs on an above-average volume – it represents a trading opportunity.
Observing patterns has always been a part of human evolution. Since markets consist of people, it is natural that the patterns will appear there as well, and even more so that traders will try to exploit them.
There are different ways to analyze market patterns, but triangle pattern forex is among the best for beginners – based on their reliability and frequency.
Which types of triangles are there in forex trading?
Generally, there are 3 types of triangle patterns, but they all show the same thing – a tug of war between bulls and bears until one side prevails.
Depending on the slope of its sides, we can distinguish ascending triangles, descending triangles, or symmetrical triangles.
Ascending triangle
This type of triangle forms when a rising trendline meets horizontal resistance. Eventually, those 2 converge on an apex, and the price breaks out, usually continuing in line with the trend. While you need at least 2 touches of the horizontal resistance and 2 touches of the rising trendline, the more significant number enhances the reliability of the pattern.
First of all, take notice that the price is in a clear uptrend – making higher highs and higher lows. Eventually, the price runs into a horizontal resistance but still continues making higher lows. Finally, notice how the volume increases during the breakout, making this a valid trade setup.
Eventually, the price retests the previous resistance that has now turned into support, before continuing higher. Entering on the retest is a safer option, but it might not happen every time. It is lower risk but also lower probability.
Descending triangle
Popular in bearish markets, the descending triangle is de-facto an opposite of an ascending triangle as it has a horizontal support and a falling trendline, which eventually converge. With descending triangles, traders look for the continuous pressure of the support, which will eventually give way to selling and break out.
First, notice that lower highs and lower lows are in play – a clear display of a downtrend. Then, price establishes the support but keeps making lower highs, thus creating an upper trendline. Finally, the volume picks up on the breakout as the price proceeds to make a new low – but not before it pulls back to the former support one more time, giving the perfect entry.
Symmetrical triangle
A type of triangle where both of the slopes are tilted, with highs and lows eventually converging at an apex. This gives you an image of simultaneous lower highs and higher lows as the price indecisiveness reaches the peak. Technically, this pattern might be the hardest one to draw correctly because it requires an accurate depiction of two trendlines.
While this symmetrical triangle has 2 converging trendlines and the volume that dries up through the pattern, the first item on the checklist falls short of our expectations.
Notice that the price makes a higher high and lower low. Yet, there is no clear indication of the trend in this period of time, and you should avoid trading continuation patterns during such times.
Understanding the Reason Why Triangle Patterns Work
As you know, even during a trend, the market usually never climbs or falls freely. Different traders enter the market at different times with different trading strategies. Some market participants will reduce their exposure after the initial trend to take some profits off the table. Some will add more exposure to their existing positions with the hope to capture the entire trend in order to maximize their profits.
These dynamic behaviors of different traders cause the market the fluctuate. Regardless of which time frame you are trading, there will always some contradiction. Generally, after a major trend takes place, the retracement happens because a lot of traders reduce their exposure in the direction of the trend.
Key facts to keep in mind
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Triangles are continuation patterns, keep the overall trend in mind when you spot one.
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The volume should slow down through the pattern but pick up on the breakout.
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You might prefer ascending triangles in uptrends and descending triangles in bearish trends.
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Trading through horizontal support or resistance will always be more precise because it is harder to make a mistake when drawing one.
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Beware of the fake breakouts. Better to wait for the retest than enter too early.
Conclusion
Triangle patterns are popular for multiple reasons. First, our eyes find them rather easily as we are so familiar with the pattern. Second, they are a continuation pattern – appearing in the middle of the trend. Thus, it is easy to verify the validity of the pattern by observing the higher timeframe. Finally, they give clean criteria of action, with a take profit and stop loss levels that are easy to calculate.
While no pattern is invincible, with little experience, time, and our checklist, triangle formations can provide steady winnings on the forex markets.
Frequently Asked Questions
Do ascending triangles break up or down?
An ascending triangle is a continuation pattern; thus, it usually breaks in the direction of the underlying trend. For that reason, it is important to monitor the trend direction, preferably on a higher timeframe. Furthermore, you should observe the volume upon the breakout – as higher volume confirms that the breakout is valid.
What is a bearish triangle?
Bearish triangle is another name for a descending triangle. It consists of a series of lower highs that are pressuring the horizontal support. Savvy traders look for a break of that support on a higher volume to sell it and place the stop-loss above the latest high of the upper resistance trendline.
What is the difference between the wedge and triangle patterns?
In contrast to triangles which are continuation patterns, wedges are reversal patterns. Thus, a rising wedge would be bearish and a falling wedge would be bullish.
Wedges might look similar, but their asymmetrical shape and sloping trendlines make them somewhat easy to spot. They are not extremely common patterns, but trade similar to triangles as you buy (or sell) the breakout. Alternatively, you might wait to enter on a pullback, for a safer trade.
What is an ascending triangle profit target?
Like a flag pattern, an ascending triangle profit target is based on the pattern’s height. You should measure the pattern and then add or subtract it from the breakout price.
