Last but not least in Unit 4 we have triangle patterns. These are common chart formations that occur relatively frequently, so it is important that you get to grips with them fairly quickly.
Here we will cover the three main types of triangle patterns and show some examples. They are the ascending, descending and symmetrical triangle.
An ascending triangle occurs when there is a clear horizontal resistance level followed by a string of higher lows. It should look something similar to this.
As you can see, the price is clearly struggling to break through the resistance but the market is showing strength with continued higher lows signifying an uptrend. Eventually, this will come to a point and the market must decide where it is going from here – a breakout is bound to happen.
In an ascending triangle the price will usually break through the resistance and breakout to the upside. However, that is not always the case. You should be ready for both eventualities.
Wait for a clear break of the pattern and set your stop loss at the point where the breakout becomes invalid again. For example, open a BUY order just above the resistance level and set up a stop loss just below the support level of the ascending triangle.
Yep, you already guessed it. A descending triangle is the exact opposite of an ascending triangle. You should look for a horizontal support line that has continually held the same level while there is weakening price action showing a series of lower highs.
Here is an example of a descending triangle:
Most of the time, the price will break to the downside. The best way to trade this setup is to set a sell order just below the support and set your stop loss at the point of invalidation, which in this case would be located just above the resistance point of the triangle.
Last but not least, we have the symmetrical triangle. This pattern is an indication of market consolidation. This means that the market is not trending in any particular direction at the moment and could be prone for a breakout to either side.
These patterns occur when the market is making a series of lower high and higher low, like this:
So how do we trade this? Well as we can be pretty sure that a breakout is coming in one direction it is better to prepare for both eventualities. Set up your long orders just above the triangle resistance line and your sell orders just below the triangle support line.
This ensures that you will catch the breakout in whatever direction it goes in. Remember to set your stop loss at the point of invalidation, which will be at the opposite side of the triangle that you opened your order.
A quick word on indicators and patterns
That about wraps it up for unit 4. It is worth quickly reiterating the importance of using a combination of these trading indicators in order for us to be successful.
If we rely too heavily on one signal then we will certainly be shooting ourselves in the foot as we won’t be trading as optimally as we could.
It is advised to use bottom up analysis while looking for multiple confluent reasons to enter a trade. The more reasons you can find to enter a trade, the better.
This may mean that you miss out on a number of winning trades, however, you will vitally avoid those losing trades that can be so damaging to our trading balance and to our mentality.
“Sometimes the best trades you make are the ones you don’t take”.