Triangle patterns offer great risk to reward ratios as stop losses are generally placed outside trendlines and prices make sharper moves when the breakout happens.
Technical analysis studies how prices have been changing in the past and predicts future prices based on them. Technical analysis assumes that price action follows a pattern and if we can find the patterns that appear the most often on the charts, we can increase our profits. On the other hand, fundamental analysis studies current events such as interest rate decisions, consumer price index CPI, unemployment, trade deficits and so on. No matter which strategy you choose to use in order to make future predictions, learning about price patterns and how they work can help make informed decisions.
In this triangle patterns guide, we’ll discuss what they are, how to identify and trade them in detail.
Triangle patterns explained
Generally, profit targets can be as high as the maximum distance between the two trend lines. Triangle patterns appear in any asset class and signal trend continuation or indecision. Triangle patterns are an important part of technical analysis. Even if you do not believe in technical analysis, learning about how to use these patterns can help you better select your entries and exits after conducting a fundamental analysis.
Types of triangle patterns
There are three types of triangle chart patterns. Each pattern is formed in various ways and signals a different outcome. We will discuss each in detail below.
Symmetrical Triangle
Symmetrical triangles can appear in an uptrend or a downtrend. It represents an indecision, as you can see from its form, the shape is not tilted towards any direction. Which means that the price can go anywhere. However, traders still love that pattern as it offers a great risk to reward ratio after the breakout.
Ascending Triangle
Ascending triangle appears in an uptrend and predicts the prices to keep going in the trend direction after the breakout. As you can see from the example, the triangle consists of two trendlines, the first line is horizontal and keeps the price from further increasing. The second line meets the first one.
Keep in mind that in order to trade the pattern profitably, you should wait for the breakout. When breakout happens, the support becomes the resistance level and a stop loss can be placed right below it. The pattern offers a great risk to reward ratio. However, false breakouts are quite common as well.
Descending Triangle
Descending triangle is an inverted version of the Ascending triangle. The pattern appears in a downtrend. According to the pattern, after the horizontal support is broken, the price will continue moving downwards.
The pattern offers a great risk to reward ratio as well. Ascending and descending triangles enable traders to join already established trends. Trade direction is in accordance with trends. Keep in mind that if the price doesn’t break the horizontal trendline and reverses in the opposite direction, the pattern is not complete and should not be traded. The triangle patterns are only ready to be entered once they break horizontal levels. Or for a Symmetrical triangle’s case, any trendline.
Using triangle patterns
As we have already mentioned, triangles should be traded after the pattern is complete and breakout happens and not before. There are a couple of indications that can help you better predict an upcoming breakout. In general, traders use volume indicators to predict breakouts. As breaching significant levels usually requires proper energy and high volume brings that energy. What’s more, high volume can indicate that the move will be significant after the breakout takes place.
Traders can open positions manually or place limit orders. For trading breakouts, traders use Buy Stop and Sell Stop order types:
- Buy Stop order helps traders to buy an asset above the market price. In this case if the ascending triangle is formed and the horizontal level is at 1.1000, a trader can place Buy Stop at 1.1010 and when the asset price breaches the pattern by 10 pips, a buy order will get executed.
- Sell Stop order is the opposite of the Buy Stop. It enables traders to sell assets from below the current market price. In this case, if a descending triangle is formed. The order can be placed below the horizontal trendline.
Pros and cons of using triangle patterns
Triangle patterns are an essential part of technical analysis. An obvious benefit of trading triangles is that they offer great risk to reward ratios. What’s more, triangles are very common and they are easy to spot on the charts. On the downside, triangles are purely technical, they do not incorporate fundamentals in their analysis. Which is why it is important to keep an eye on the economic calendar. Upcoming economic events such as interest rate announcements, CPI numbers, inflation, unemployment, trade deficits, political turmoils and so on can jeopardize your trades. In order to counter this, most technical traders wait for the economic news to be announced and only participate in the markets afterwards. In addition, false breakouts can become an issue as they are quite common in trading. In order to make breakouts more predictable, some traders use volume indicators. As usual, volume increases when significant levels are broken. What’s more, high volume can be a precursor to sharp market moves.
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Pennants
Pennants look very similar to ascending and descending triangles. The only difference is that pennants appear in fast moving markets, have smaller bodies and continue the trend shortly after their formation. There are Bullish and Bearish Pennants. And both share the same principles when it comes to stop loss placement.
The main takeaways
To sum everything up, chart patterns are an essential part of technical analysis. Triangle chart patterns are easy to understand and easy to trade, which makes them widely used patterns in trading. What’s more, they offer great risk to reward ratios. There are 3 types of triangle chart patterns:
- Symmetrical Triangles – that can be formed in various market conditions and the price direction is not specified.
- Ascending Triangles – that form in an uptrend. They consist of horizontal resistance and tilted support trend lines that have a common touching point. Ascending triangle trend lines predict the prices to keep increasing after the resistance is broken.
- Descending Triangles – that form in a downtrend. They are opposite versions of the ascending triangles. Descending triangles predict the prices to keep falling after the lower trendline is broken.
Bullish and bearish Pennants look very similar to Ascending and Descending triangle patterns respectively. The main difference is that the Pennants are formed in strong, fast moving trends.
Pattens work best in higher time frames due to reduced noise and it’s best to use them coupled with fundamental analysis. As economic events can have unpredictable results to your technical predictions. To counter this, many technical traders avoid placing orders prior to important announcements.
FAQs on triangle patterns in Forex trading
What do triangle patterns mean?
Triangle chart patterns are price patterns that are named due to their shape. The pattern appears when price action becomes less and less volatile, the pattern consists of two trend lines that have one common touching point and therefore, looks like a triangle.
Is triangle pattern bullish or bearish?
There are three types of triangle chart patterns. Ascending Triangle is a bullish pattern. It appears in an uptrend, signalling price continuation when it breaks. Descending triangle is a bearish chart pattern. It forms in a downtrend and signals price continuation downwards when it breaks. A Symmetrical Triangle is neither bullish nor bearish. It represents indecision. However, traders still take advantage of trading the pattern as it offers great risk to reward ratios.
How do you spot triangles in forex?
Triangle patterns are easy to spot, hence the reason why both professional and novice traders are actively using them. Triangles appear in trends where two trend lines meet each other.
Are triangle patterns profitable?
Some traders manage to trade triangles profitably, while others fail to do so. It all depends on your skills as a trader. Triangle patterns offer great risk to reward ratios. However, false breakouts are quite common. If you can reduce trading false breakouts and take the advantage of high rewards, trading triangles can become profitable for you.
