In technical analysis, traders can rely on different patterns and indicators to identify or predict trend reversals. However, a few patterns represent periods of price consolidation. The symmetrical triangle pattern is one of the most reliable indicators in this category. Let us explore what this pattern looks like, learn how to interpret it and see how you can trade using this pattern.
What is the symmetrical triangle pattern
The symmetrical triangle pattern is a trend consolidation signal that consists of two converging trendlines. The upper trendline connects successive peaks, while the lower trendline connects successive troughs. The peaks decline in height while troughs sequentially get less deep, so the trendlines eventually meet.
The slopes of the upper and lower trendlines need to be nearly equal, giving the impression that they are two sides of a symmetrical triangle — which is the shape after which the indicator is named.
Decoding the appearance and significance of a symmetrical triangle pattern
During the trading sessions that make up the symmetrical triangle pattern, the peaks get lower, and the troughs are more shallow. This essentially represents a period of reducing volatility in the market when the prices are being consolidated within a shrinking range.
The main physical attributes of a symmetrical triangle pattern include the following elements:
- Two distinct converging trendlines: You need to have two distinct trendlines — one connecting the successive peaks and the other linking the successive troughs. These two will eventually be extrapolated to converge.
- Roughly similar slopes: The slopes of the trendlines must be similar. This essentially indicates that the buyers and the sellers in the market are equally strong (or equally weak). As a result, the price volatility shrinks temporarily before it shoots up.
- Reducing resistance and increasing support: The upper trendline represents the broad resistance level in the market, while the lower trendline indicates the support level. The resistance typically decreases while the support increases till the trendlines meet.
Eventually, the price breaks out of this zone after the formation of the symmetrical triangle pattern. If the price breaks out upward past the upper trendline, it may indicate the beginning of a bullish trend after the consolidation period. However, if the price breaks downward beyond the lower trendline, it may be the start of a bearish trend.
Symmetrical triangles vs ascending/ descending triangles
A symmetrical triangle pattern is not the only trend continuation candle pattern that you may notice on a price chart. Depending on the slope of the trendlines, you can find two other types of candle patterns:
- Ascending triangle pattern: In this pattern, the upper trendline is horizontal while the lower trendline ascends to meet it. It represents a flat resistance level alongside a rising support level before the breakout happens.
- Descending triangle pattern: This is the opposite of an ascending triangle pattern. Here, the lower trendline level is flat while the upper trendline descends to meet it. This means the support is unchanged, but the resistance declines before the breakout.
Tips to trade a symmetrical triangle pattern
Trading a symmetrical triangle pattern involves looking for confirmation and identifying different essential parameters like the entry point, target profit and stop-loss levels. Here are some crucial tips that can help you plan your order smartly.
- Seeking confirmation: To confirm the market sentiment, wait to check the direction of the breakout. If you are a conservative trader, you can even check the candle on the day following the end of the symmetrical triangle pattern to confirm if the trend has sustained. In addition to this, you should also look at the trading volume to evaluate the strength of the breakout. A higher trading volume indicates that the breakout may be more reliable.
- Planning your entry: If you notice the symmetrical triangle pattern, the ideal entry for a trade will be in the session following the breakout. This will help you confirm the direction of the trend before taking a long or short position accordingly.
- Setting your stop-loss: The stop-loss for any trade following the symmetrical triangle pattern is generally just below the breakout price or above the breakdown price. For instance, say the price of a stock is at Rs. 100. It then moves up to Rs. 130 before the consolidation begins. After a period of shrinking volatility, the price breaks out at Rs. 108 and moves upward. In this case, the stop-loss must be set just below Rs. 108.
- Identifying target profits: Having a target profit helps you set realistic expectations for your trade. Typically, the price you should target involves adding the difference between the high and low at the start of the pattern to the breakout price. So, in the example mentioned above, the high and low prices at the beginning of the symmetrical triangle pattern are Rs. 100 and Rs. 130, respectively. The difference between these two is Rs. 30. You add this to the breakout price of Rs. 108 to arrive at the target price of Rs. 138.
Conclusion
Other triangle patterns are often misinterpreted as the symmetrical triangle pattern (or vice versa). Although the trading strategies may be similar, the key difference is that in the symmetrical triangle pattern, the trend may turn bullish or bearish. So, if you notice this pattern on the price charts you are tracking, ensure that you have a trading plan for both possible scenarios.
