Unbiased Forex Broker Experts

Part VII. Triangles

Triangles - Forex School
Commander in Pips: Today we will turn to discussion of a pattern that is widespread on the market – different types of triangles.

Pipruit: Hmm, and what kind of triangles could there be?​
three major types of triangles – symmetrical, ascending/descending triangle and broadening top/bottom - Forex School
Commander in Pips: Well, there are three major types of triangles – symmetrical, ascending/descending triangle and broadening top/bottom.

Although, in the classical school of technical analysis, triangles are treated mostly as continuation patterns, in the modern environment they become reversal as often as continuation. Also, the classical rules of triangles trading are well-known, so market-makers very often push the market to fake breakouts of triangles to grab the public’s stops.

In general a triangle looks very similar to a wedge pattern, but the nature of a triangle not in just “exhausting” but more as “indecision”. Yes, very often triangles lead to continuation, but to reversals also, especially broadening top/bottom.

Symmetrical triangles

Symmetrical triangles usually have horizontal direction and an apex at the end of the pattern. The price action inside the triangle forms lower highs and higher lows with equal speed, or almost equal. It suggested that symmetrical triangles more often leaded to continuation of the previous trend rather than to reversal. But take a look at weekly EUR/USD chart – this is not a rule of thumb:

Chart #1 EUR/USD Weekly – Reversal symmetrical triangle
EUR/USD Weekly – Reversal symmetrical triangle - Forex School
See – although this triangle could be treated as symmetrical, it has led to a reversal in the long-term trend on the Euro. Here you can clearly see lower highs and higher lows that have been formed by the price.

Chart #1 EUR/USD Weekly – Reversal symmetrical triangle
EUR/USD Weekly – Reversal symmetrical triangle - Forex School
Pipruit: Commander, but it looks like highs descending is a bit faster than lows ascending… Are you sure that this triangle is symmetrical?
Commander in Pips: Mostly yes. Although your question is reasonable and sometimes triangles have perfect symmetry, still, the most patterns have some skew, but this skew does not cancel the property of triangles.

Pipruit: Could you please be so kind to explain to me the market mechanics. I suspect that although triangles looks very similar to wedges – the market mechanic are still different. Am I right?
Commander in Pips: Yes, that correct. If we will take an attentive look to both of these pattern, we’ll see that the Wedge has some direction – up or down, but a symmetrical triangle does not. And a wedge’s direction is based on different speed of highs and lows and simultaneously direction of highs and lows is the same. But there is absolutely vice versa with triangles – highs and lows tend toward each other and form the apex of a triangle, and the triangle does not have a direction – it’s flat. All these nuances tell us that triangles are not the pattern of exhaustion of a previous move, but the pattern of just consolidation, when the market falls into indecision. Volatility also reduces during triangles – because the range between the highs and lows becomes tighter – this is a situation of dampening in market vibrations. Investors try to look at the market with fresh view and assess – is it proper direction, and has something changed or not? And as we know, after a calm period we should wait for an explosion. The market is building energy inside the triangle – as buyers and sellers couldn’t take domination inside the triangle. But when most participants become sure with some direction – then the market shows breakout and the move after it could be significant.

Pipruit: I see, and what we should look for, when a triangle is still forming, how we could foresee the direction of breakout?​

Commander in Pips: Well, there are some moments, but it’s very dangerous to anticipate a breakout and open position for that purpose. You have to get a very strong signals and signs from the market that could give you confidence about the direction of a breakout.

1. It counts that perfect triangle should have 5 swings inside the triangle’s body and the breakout should happen in continuation of 5th swing. In this case, the triangle will be a continuation pattern. But this is not absolutely necessary. Sometimes, a triangle has just four swings, or 1-3 swings and then choppy price action inside the triangle without any well-defined swings.

2. If market didn’t break the triangle during 5th swing and formed 6th swing – then it could lead to one of two results:

- Breakout will be in opposite direction to previous trend (as on chart #1);

- The market could show shift to sideways consolidation and exit from the triangle naturally, flat, without any breakout.

3. As with a wedge pattern, if the market couldn’t reach the opposite border of a triangle and returns right back (this usually happens during 5th or 6th swing) – then very probably that market will show a breakout in this direction.

4. Classical target of triangle pattern is a distance of the initial swing of the triangle that counts from breakout point in th direction of the breakout (Chart #1). But you can apply different tools, say, Fib extensions to estimate the target – as on our chart #1.

5. Very commonly that with symmetrical triangles, the mostly applicable Fib ratio is 0.786 or 0.88. For instance, on chart #1 the former lows are 0.88 retracement from the latter ones, so as highs. If closer to an end of triangle (5th swing) the level of retracement becomes, say, 0.618 or even 0.5 – then it could give you an early warning about breakout direction. Assume that the market has formed a low of 5th swing, but this low is just 0.618 from the previous swing up – then, possibly sellers have become weaker and breakout will be to the upside. But do not rely only on this sign – use it only as a part of overall context.

Pipruit: Cool. This could be useful. But how to trade a triangle, if we do not know the direction of breakout?​

Commander in Pips: Well, it’s not so simple:

1. As a rule we assume that a breakout should happen, right? If we do not assume that, then, possibly we should stay outside the market, because in this case we do not want to trade on a choppy market with a tight range and absence of any direction.

2. The safest way to trade – wait to confirm the fact of breakout and make sure that this was a true breakout. Then wait for the first Fib retracement and use it to enter in the direction of the breakout. On Chart #1 such retracement you can see, when the market has reached 100% Fib extension target and 0.9750-1.000 area.

Pipruit:
 Well, but market has passed significant move, we had to skip a solid move in this case…​

Commander in Pips:
 Right, but this is not always the way it happens. Very often after breakout, the market returns back and tests the border of the triangle from the other side. This kind of price action could give you an excellent opportunity to enter and place a tight stop inside the triangle body, because if market returns back to the inside, then the breakout was false.

Second, sometimes the market shows acceptable retracement very soon after breakout. But anything could happen, so probably you will miss some triangles. Still it’s better than to miss your money, right?

Pipruit:
 Right…​

Commander in Pips: Ok, let me continue.

3. The aggressive way of trading offers the followed procedure. If you can’t estimate the probable direction of breakout, then you can use OCO order, or just do this manually. You can place two stop entry orders (buy order above upper border and sell order below the lower one of triangle). When breakout will happen your stop entry order will be hit and second order will be canceled (or you have to cancel it manually). But this way has couple of additional risks – you should place farther stop loss order, because during the breakout the market could show significant volatility. Second – you have to hope that this breakout will be true. If not – then, probably, you will lose your money.

4. Finally, the most preferable and softer way is to open position prior the breakout, based on some market signs, as with wedge pattern that we’ve discussed. It could be some patterns, trend signals or something. But the major task here is to estimate a good level for stop loss placing that will be crucial for further market move. Other words – if market will hit your stop loss, it should mean that you definitely wrong and shouldn’t expect breakout in this direction any more.

5. And last significant issue. If you expect some breakout – draw Fib support or resistance lines from previous large swing, after which triangle has appeared. If there is Confluence support or resistance, that stands very close to some border of triangle, and breakout has happened in direction of this area – be aware of fake breakout, because strong support or resistance could clap the market right back into the triangle.

Pipruit: Oh, again, so many rules, how could I remember all of them?
Commander in Pips: In fact they are quite the same as with other patterns. You should understand just the major principle.

Pipruit: Is it possible at all?
Commander in Pips: Sure, it’s not so hard – just reread what we’ve talked about wedge trading and you’ll see many common things.

Pipruit: Well, I’ll try if you say that…
Commander in Pips: Here is an example of a continuation symmetrical triangle on JPY:

Chart #2 | JPY/USD Weekly –Continuation symmetrical triangle
JPY/USD Weekly –Continuation symmetrical triangle - Forex School
Pipruit: But here market has not reached the target – it couldn’t pass the same distance as triangle body, right?
Commander in Pips: Yep, this also very often happens on the market. Also, take a look – the price action inside the triangle was, say, “strange” – long-long 4th swing down, then short-term splash, looks like this was a 5th swing and breakout. As you can see – it’s very difficult to see an absolutely perfect pattern.

Ascending and Descending Triangles

They call like that, because these triangles have one side as horizontal support or resistance and another one as with common triangle. Look at chart #3 – then you will understand it better:

Chart #3 | CHF/USD Weekly – Ascending triangle
CHF/USD Weekly – Ascending triangle - Forex School
Pipruit: Ok, I think I’ve got it. It calls ascending, because its base has an upward slope and market establishes higher lows. But the other side is a horizontal resistance level that holds market until breakout.

But Commander, looks like this kind of triangles have a bit different market mechanics?
Commander in Pips: That’s right, but I think that you can explain it by yourself…

Pipruit: Well, I suspect that while in common symmetrical triangle as sellers as buyers are indecision, here – nobody indecision. I see that buyers are strong, since market shows higher lows. But sellers’ strength gradually is out – because although they push buyers from resistance again and again, but each time this pushing is weaker, because sellers could not push down buyers at the same lows – buyers creep and creep closer and closer to resistance, until breakout happens.

Wait a minute, does it mean that ascending and descending triangles are often continuation patterns?
Commander in Pips: Absolutely not. Although classical school tells that breakout in direction of the hypotenuse slope (i.e. in direction of triangle) is more probable, very often you can see a breakout in the other direction, when horizon resistance level appears to be too tough for buyers…

And now I want to share with you an important advanced moment that could help you to foresee the direction of the breakout.

Advanced talk on breakout direction

Commander in Pips: Although the next chart is not currency – this is 2-year US Treasuries notes, but later I show you the same example on AUD.

Here you can see ascending triangle. But take a look at MACD! It clearly shows excellent bear trend. Do you see any bear trend on the chart?

Chart #4 | 2-year US Treasuries monthly and market pressure
2-year US Treasuries monthly and market pressure - Forex School
Pipruit: No, I just see, that market stands in consolidation, and this is triangle.​

Commander in Pips:
 Right. It means that price action does not support trend shifting and such situation calls as “Market Pressure” or “Dynamic Pressure”.

Pipruit:
 And so what? How should I interpret it?​

Commander in Pips:
 Think by yourself. If trend turns bearish, but market stands…

Pipruit:
 Well, possibly it tells that bulls are stronger than it seems at first look.​

Commander in Pips:
 Absolutely. Market accumulates energy and as we can say that trend couldn’t force price to follow it. Here we see an example of Bullish pressure. The result of it – is an upside splash that should take out previous highs.

Pipruit: So, the market should continue its move up and accomplish triangle’s target, right?​

Commander in Pips:
 No. The target is only the highs takeout, but will the market continue to upside or not? – who knows. But this is already a great advantage to you. You know what to expect. That’s why you will not enter short until that will happen. Second, you know what to expect. For instance if market takes out the highs and shows bearish engulfing – you understand that this is false breakout and enter short right on top.

Here you can see, what could happen in such situation as on AUD/USD weekly chart#5.

Chart #5 | AUD/USD Weekly and market pressure.
AUD/USD Weekly and market pressure - Forex School
All quite the same, but on chart #6 you will see how cunning could be market makers. Here you can see, that during the week, the market has shown the breakout of the triangle. Public, as usual has taken it and place stops above the triangle. Very obvious, predictable and…wrong. What will the market makers answer? See chart #7.

Chart #6 | AUD/USD Weekly and public thoughts.
AUD/USD Weekly and public thoughts - Forex School
Chart#7 | AUD/USD Weekly - market makers answered:
AUD/USD Weekly - market makers answered - Forex School

Pipruit:
 Cool! But Commander, what we have to do in such circumstances?
Commander in Pips: Well, first of all – always use a common sense. Don’t be deceived by a picture. We see that the trend turns bearish but the market creates higher lows and stands straight. It means that bears couldn’t push the market lower, hence the bulls are strong, but their strength is hidden in this type of price action, their strength is in pressure on bears.

Suppose, that you have entered on unconfirmed breakout as public did. But, at the end of the week – you see, that there is no confirmation, hence your initial context for trading has failed – you have to close position. Since the market has returned back inside the triangle, it does not intend to break it to the downside, because this is unnatural price action and this reestablished the previous context of market bullish pressure. Here you should enter on the long side. What has happened then – you can see on chart #7.

But to be honest – this is a very difficult case to trade. All that I want to show you – watch how trend and price confirm each other, but the priority is on price, not on the MACD. The last word belongs to price action. It will help you to foresee the direction of breakout.

Pipruit: This is really priceless information Commander. I’ll try it. And could such pattern fail?
Commander in Pips: Of course it could. Anything could fail on market. If the market shows breakout in the opposite direction – wait for confirmation and take some pause to have necessary confidence in the breakout. Then you can trade it. But this situation has a huge advantage – even if this will happen - you are not in the wrong position.

All that we’ve said for ascending triangles is absolutely applicable to descending triangles. Here on chart #8 you can see what it looks like. Here by the way, the market has reached the target perfectly, as you can see.

Although our examples here are continuation triangles – they also could be a reversal. Here is one by the way – on chart #9

Chart#8 | EUR/USD 4-hour - descending continuation triangle
EUR/USD 4-hour - descending continuation triangle - Forex School
Chart#9 | EUR/USD Daily - descending reversal triangle
EUR/USD Daily - descending reversal triangle - Forex School
Pipruit:
 Thanks Commander for pictures. It’s really important to see, how they should look like.
Commander in Pips: You’re welcome. So, there is only last type remains – broadening tops/bottom. Let’s talk about it.

Broadening Tops/Bottoms

This type of triangle is mostly reversal rather than continuation, even more, the fact of continuation treated as failure of the pattern. The major difference with these patterns compared to common triangles is that Broadening Top/Bottom starts from apex and then increase swings as upward as downward. That’s why it is called like that.

In fact – this is a single pattern and it looks similar as on tops as on bottoms. It counts that appearing of such pattern could lead to reverse of the market trend. This pattern as a rule has no slope, so it horizontal. But it’s enough blah-blah-blah, let’s take a look at the picture. I couldn’t find perfect pattern to show you on Forex, that’s why I use for explanation example on Dow Jones equity index. But later I’ll show you this pattern on GBP/USD

Chart#10 | Dow Jones weekly – broadening top
Dow Jones weekly – broadening top - Forex School
As you can see pattern starts from apex, and then market creates higher highs and lower lows.

- Theoretically the market should show 5 swings.

- The 6th swing should be retracement of the 5th one and used for entering the market. Usually it 0.618-1.0 of 5th swing;

- The time between swings should be equal – this is perfect, but it’s rare to happen;

- The most applicable Fib ratios here are – 1.272; 1.618 for tops and bottoms. It means that latter top/bottom should be 1.272 or 1.618 extension of previous ones.

- Also it’s possible that 5th swing will be 2.0 extension of the 4th one, but not greater. If it will be greater, than possibly market will continue it’s tendency.

- 6th swing usually just a Fib retracement from 5th swing and most applicable ratios are 0.618; 0.786 and 0.88. Sometimes it could be 1.0 but this is not very good.

- The high or low (depending on where this pattern forms) of 5th swing is a failure point. If market will break it, then, possibly this pattern should be treated as failed. Hence, stop loss should be placed somewhere beyond the 5th swing.

If this pattern fails – usually it could lead to strong move in this direction. Look at chart #11:

Here you can see – all things were in order, until market returns back and has tried to take out 5th highs during the 6th swing up. This is already uncommon and should worry you, if you intend to enter short with this pattern. Second warning – market starts to move lower but has not reached the lower border of this pattern. It means that the failure is very probable.

Then, market has closed above the 5th swing high and confirmed pattern’s failure. Hence – you should wait for possibility to enter long, and it has come with Fib retracement very soon after failure.

So, I hope that this is quite enough with triangles. Try to learn this well.

Chart#11 | GBP/USD Daily – broadening top failure
GBP/USD Daily Broadening Top Failure - Forex School
Pipruit: Very interesting pattern and looks nice. Thank you for all material Commander. I think, I’ll better start to study it carefully again, if you don’t mind.​

Commander in Pips: Sure, go ahead.

Comments

georgeta
7 years ago,
Registered user
Hello Mr. Morten!
I read something about triangles. They said that if the forming of the pattern takes longer than the previous trend, more probable it will be a reversal. What do you think?
Thank you!
Sive Morten
7 years ago,
Registered user
> Hello Mr. Morten!
I read something about triangles. They said that if the forming of the pattern takes longer than the previous trend, more probable it will be a reversal. What do you think?
Thank you..

Hi Georgeta,
well, it seems reasonable. Unfortunately, I didn't pay attention in my experience to triangles trading in this way..
Interesting, I need to look at this from that point of view in my future trades. Thanks.
Hamza Samiullah
a year ago,
Registered user
Nice work
One-fm
7 months ago,
Registered user
great.

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