You should know and understand triangle chart patterns. Triangle chart patterns appear relatively common in price charts. Through triangle chart patterns you can ride on a potentially high momentum move that is likely to occur after a period of decreasing volatility. Triangles are one of the best depictions of decreasing price volatility in the currency price charts. A high probability trade is in sight when the technicals are coupled with the current market sentiment when a particular type of triangle has been identified by the trader. All triangles show decreasing price volatility in action. Triangles are basically continuation patterns. But they can also be reversal patterns. This depends on the different types of triangles and whether they occur in an uptrend or a downtrend. Triangles are also known as Wedges. There are basically three types of triangles:
1) Ascending Triangle,
2) Descending Triangle and
3) Symmetrical Triangle.
Ascending Triangle:
When you see an ascending triangle on the chart, it is basically a bullish signal. It can be either a continuation or reversal pattern. An ascending triangle can be easily identified by its upward sloping trendline. This upward sloping trendline creates the lower boundary of the ascending triangle. The upper boundary is roughly horizontal. This horizontal line should connect at least two price points. The horizontal line represents the resistance level. What is the crowd psychology behind an ascending triangle? The crowd psychology behind the ascending triangle is this that every time the currency price goes up to the resistance level; there is sellers in the market who push the price down.
When the prices retreat from their high and are on the way down, there are buyers who believe very strongly that the currency price should rise based on their own reasons. The buyers thus bid the prices higher than the previous low forming the upward slope of the triangle. The triangle is formed when these two lines converge at a point. The appearance of an ascending triangle should prepare you for an upside breakout form the resistance. Breakouts tend to occur in the middle or the third of the triangle formation measuring from the start of the triangle to the tip. The general guideline is this that when you see an ascending triangle during an uptrend, it is seen as an uptrend continuation pattern. But if it formed during an existing downtrend, it acts as a bullish reversal pattern.
Descending Triangles:
Even though it can be a continuation or reversal pattern, a descending triangle is viewed as a bearish formation. A descending triangle and an ascending triangle are the opposite of each other. A descending triangle can be identified by the downward slope of the trendline which is formed by connecting the lower price highs. This downward sloping trendline forms the upper boundary of the triangle. The horizontal lower boundary of the triangle represents the support level and it is formed by connecting at least two price points.
Spotting a descending triangle in a downtrend signals the downside breakout of the support level. The crowd psychology behind the descending triangles is that every time the currency price goes down to a certain level that forms the support there are buyers who want to hold that level stubbornly. They thus push the price up each time the support level is tested.
Thus when the price bounces off the support level, the bears take the opportunity to short again. Sellers are quite anxious to sell as they feel that the currency price should fall over time. This causes a domino effect. Prices go down even lower. Thus fulfilling a sustained downside breakout!
If it is a down trend, spotting a descending triangle should allow you to be prepared for a downside breakout from the support level. Bulls and bears face a skirmish with both camps not feeling confident of the next market move as with an ascending triangle. This is the transition period from low volatility to high volatility.
When the support level is broken, many of those long positions which have been placed above that level soon get stopped out. Prices tend to break in the middle or the final third part of the triangle formation.
It tends to give off even more bearish vibes than if it is formed during an uptrend if the descending triangle is formed during an existing downtrend. Unless you have reversal signals in the form of technicals or turn around of the market sentiment, you should always assume the continuation of the prevailing trend.
If the descending triangle appears in the midst of a downtrend, the triangle serves as a continuation pattern. A descending triangle should not be considered to be the final word on impending downside breakout. However, with that said prices also sometimes breakout from above the descending triangle successfully in a burst of bullish momentum.
Symmetrical Triangles:
A symmetrical triangle has some resemblance to a wedge pattern. A symmetrical triangle consists of two converging trendlines that join a series of lower highs and higher lows. There are no horizontal lines in symmetrical triangles. This differentiates it from the ascending and the descending triangles. The higher lows are formed when buyers of the currency pair are willing to pay a bit more to get a piece of action. As they are willing to accept less and less of the price over time, the lower highs reflect the mildly bearish conviction of the sellers.
There is no way to predict the future breakout direction until one of the symmetrical triangle lines is penetrated. A symmetrical triangle tends to be less reliable as compared to an ascending or descending triangle. Breakouts usually occur in the middle or the final third of the triangle as with the other sloping triangles. You should always consider other pieces of information so that you can better pinpoint a higher probability trade set up when trading triangle breakouts. Decreased volatility can also be detected with the exponential moving averages and the Bollinger bands besides the triangle formation.
Hassam 