What are Triangle Patterns In Forex? How does it Work?

As a forex trader, you must know there are all kinds of charts patterns in the the study of technical analysis. Those patterns including flag patterns(we talked yesterday) provide access to large amounts of information and reflect the happenings of a specific long or short-term period. Today we're are going to introduce another crucial component of technical analysis-triangle pattern.

In this article, we will guide you through what triangle pattern is, and what different triangle types are, and how to use different strategies on all triangle patterns.

What are Triangle Patterns in Forex?

Triangle Patterns(Triangles) can be best described as horizontal trading patterns. At the start of its formation, the triangle is at its widest point. As the market continues to trade in a sideways pattern, the range of trading narrows and the point of the triangle is formed. In its simplest form, the triangle shows losing interest in an issue, both from the buy-side as well as the sell-side: the supply line diminishes to meet the demand.

Think of the lower line of the triangle, or lower trendline, as the demand line, which represents support on the chart. At this point, the buyers of the issue outpace the sellers, and the currency's price begins to rise. The supply line is the top line of the triangle and represents the overbought side of the market when investors are going out taking profits with them.

What are the Types of Triangle Patterns?

There are three different types of triangles, and each should be closely studied. These formations are, in no particular order, the ascending triangle, the descending triangle, and the symmetrical triangle.

1.Ascending Triangles

Ascending triangles are bullish continuation patterns that form when the upper trend line is flat or horizontal while the lower trend line continues to rise diagonally. This indicates the up trend has stalled while the support line representing buyers continues to rise, thereby closing the distance between the lower and upper trend line. Eventually the lower trend line closes in the gap enough to cause impatient bidders to come off the fence in a buying spree that surges the price through the upper trend line resistance with heavy volume. This breakout action resumes the next leg on the up trend as prices climb to new highs.

2.Descending Triangles

Descending triangles are bearish continuation patterns. They are an inverted version of ascending triangles. The form as a downtrend stalls out. The lower support trend line goes flat or horizontal as the upper trend line continues to fall diagonally closing the gap. The upper trend line represents sellers anxious to unload their position by lowering the ask/offer prices. Eventually sellers get impatient and overwhelm the support trend line by dumping currencies. This triggers panic as the price collapses in a breakdown that kick starts the next leg of the downtrend making new lows.

3.Symmetrical Triangles

Symmetrical triangles are continuation patterns of the prior trend, which may be bullish or bearish. These are indicated with a falling upper trend line and a rising lower trend line. This indicates both the sellers lowering their offers, while buyers are raising their bids. Eventually, one of the trend lines will break to trigger the next leg in the preceding trend. These triangles usually will have three contact points before they trigger the break. This means the lower, upper and lower or upper, lower and upper trend lines tag prior to the break that resumes the earlier trend. The longer the triangle goes without a break as the price gets closer to the pinnacle, the greater the chances of a failure.

How to Use Different Strategies on all Triangle Patterns?

1.Breakout Strategy

The breakout strategy can be used on all triangle types. The execution is the same regardless of whether the triangle is ascending, descending or symmetrical.

The breakout strategy is to buy when the price of an asset moves above the upper trendline of a triangle, or short sell (sell the asset before it hits a lower price, intending to buy it back even lower) when the price of an asset drops below the lower trendline of the triangle.

Since each trader may draw their trendlines slightly differently, the exact entry point may vary between traders. To help isolate when the price is breaking out of the support or resistance levels, observing an increase in volume can help highlight when the price is starting to gain momentum towards a breakout.

The objective of the breakout strategy is to capture profit as prices move away from the trend lines forming the triangle.

If the price breaks below triangle support (lower trendline), then a short trade is initiated with a stop-loss order placed above a recent swing high, or just above triangle resistance (upper trendline).

If the price breaks above triangle resistance (upper trendline), then a long trade is initiated with a stop-loss order placed below a recent swing low, or just below triangle support (lower trendline).

2.Anticipation Strategy

More advanced forms of the breakout strategy are to anticipate that the triangle will hold and to anticipate the eventual breakout direction. By assuming the triangle will hold, and anticipating the future breakout direction, traders can often find trades with very big reward potential relative to the risk.

For instance, assume a triangle forms and a trader believes that the price will eventually break out to the upside. In this case, they can buy near triangle support (the bottom of the low), instead of waiting for the breakout. This creates a lower entry point for the trade; by purchasing near the bottom of the triangle the trader also gets a much better price.

Placing a stop-loss just below the triangle reduces the amount of risk on the trade. If the price does break out to the upside the same target method can be used as the breakout method discussed above. Because of the lower entry point, the trader that anticipates stands to make much more than the trader who waited for the breakout.

If a trader thinks the price will eventually break below the triangle, then they can short sell near resistance and place a stop-loss just above the triangle. By going short near the top of the triangle the trader gets a much better price than if they waited for the downside breakout.

To use the anticipation strategy a triangle needs to touch the support and/or resistance level at least three times. This is because it is on the third (or later) touch of support or resistance that the trader can generally take a trade—peaks and troughs generally run in series of three.

Conclusion

Triangles are highly favorable trading patterns because they are straightforward to interpret and confirm and establish support and resistance levels and a price target following a breakout.

Although triangles more frequently predict a continuation of the previous trend, it is essential for traders to watch for a breakout of the triangle before acting on this chart pattern.

Be careful trading different types of triangle, as traders may be faked out on bullish and bearish signals that reverse shortly after the trend starts. It is recommended to hold off for a day after the breakout to determine if the pattern is real or not.