Symmetrical triangle

Symmetrical triangle
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Symmetrical triangle is a chart pattern in technical analysis. In symmetrical triangle variability of prices declines, which means that the lowest price from week to week gets higher and the highest one gets lower. The lines connecting all the peaks and drops create a shape of triangle. A symmetrical triangle chart pattern represents a period of consolidation before the price is forced to breakout or breakdown. A breakdown from the lower trendline marks the start of a new bearish trend, while a breakout from the upper trendline indicates the start of a new bullish trend. The symmetrical triangle is one of three important triangle patterns defined in classical technical analysis. The other two triangles are the bullish ascending triangle pattern and the bearish descending triangle pattern. It is difficult to predict the triangle. It depends on a situation where supply and demand have reached balance. Typically, there will be a breakout to one side or the other before the price of the underlying stock or index reaches the peak of the triangle.

Symmetrical triangle - interpretation

That kind of chart pattern is typical for a period of consolidation before important change. The change is difficult to predict. It can be breakout (crossing upper line) or breakdown (crossing lower line). It is difficult to interpret which way the pattern will go. It should be used with other tools of technical analysis.

While there are instances when symmetrical triangles mark important trend reversals, they more often mark a continuation of the current trend. Regardless of the nature of the pattern, continuation or reversal, the direction of the next major move can only be determined after a valid breakout (R. D. Edwards and others 2018)

• Trend: In order to qualify as a continuation pattern, an established trend should exist. The trend should be at least a few months old and the symmetrical triangle marks a consolidation period before continuing after the breakout.
• Four Points: At least 2 points are required to form a trend line and 2 trend lines are required to form a symmetrical triangle. Therefore, a minimum of 4 points are required to begin considering a formation as a symmetrical triangle.
• Volume: As the symmetrical triangle extends and the trading range contracts, volume should start to reduce. This refers to the quiet before the storm, or the tightening consolidation before the breakout.
• Duration: The symmetrical triangle can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a pennant. The most often the time duration is about 3 months.
• Breakout: The ideal breakout point occurs 1/2 to 3/4 of the way through the pattern's development or time-span. The time-span of the pattern can be measured from the peak back to the beginning of the lower trend line. A break before the 1/2 way point might be premature and a break too close to the apex may be insignificant. After all, as the apex approaches, a breakout must occur sometime.
• Direction: The future direction of the breakout can only be determined after the break has occurred. Sounds obvious enough, but attempting to guess the direction of the breakout can be dangerous. Even though a continuation pattern is supposed to breakout in the direction of the long-term trend, this is not always the case (J. J. Murphy 2013)

References

Author: Piotr Budz

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