Trader Triangle

Formation of triangle, or trader triangle, in the price movements of a stock indicates that in a smaller trading range, the price fluctuations continue.

They are not easy to use as a forecasting tool. There are some perceptions that give insight into future market action but using the triangles, as a forecasting tool is not an easier task.

A triangle could signal a reversal or continuation of the trend but identifying triangle patterns allows for trading opportunity during formation and after a breakout from the pattern. The resistance and support areas in the formation of a triangle are identifiable as daily fluctuations move toward the apex.

Types of Triangles

Various kinds of triangles could be formed and all these various signals different scenarios.

· Symmetrical Triangles are formed when lines drawn connecting peaks and troughs tend to converge at the center of the pattern. There is a high probability that the future price will trend in the direction of the breakout when there is an increase in volume along with a price break outside of the pattern.

· Ascending Triangles are formed when a line connecting the peaks is horizontal while the line connecting the troughs rises and converges with the top line as a series of rising troughs meets resistance at the same level. Volume often remains moderate to low throughout the formation of the trader triangle with marked increases on the breakout.

· Descending Triangles are formed when troughs form a horizontal line while a series of falling peaks create a line that is a downward sloping resistance line.

It must be noted that a trader triangle is subject to many false moves and are among the least reliable of chart patterns. Usually in triangles the trend leading into the triangle continues on the breakout of the triangle.

Breakouts can occur usually at a distance of 2/3 to the apex through to the apex itself. When a breakout occurs, the trend that results is expected to be in the direction of the breakout.

Analysts recommend observing the volume at the occurrence of a breakout. A breakout on increasing volume is a good sign for a continuation of the price trend in the direction of the breakout. The intensity of buying and selling pressure and the conviction behind each move can be useful in determining the validity of the break out.

When markets are in a trading range there is a build up of stop loss orders just outside of the pattern, on both sides of the market that can create volume spikes when a breakout does occur. Price projections can be useful in triangle formations. The price range of the base of the trader triangle opposite the apex is considered to be a fair estimate of the move that will occur after the breakout from the triangle formation.