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)

Examples of Symmetrical triangle

  • Stock Market: Symmetrical triangle chart patterns can be seen in stock market, especially when a stock is in a trading range. A trading range is a situation where buyers and sellers are in balance, and the stock price moves in a tight range. If the price of a stock is forming a symmetrical triangle chart pattern, it means that buyers and sellers are in balance, but one side is likely to gain control soon. This could be an indication that the stock is about to breakout or breakdown.
  • Currency Exchange: Symmetrical triangle patterns can also be seen in currency exchange markets. For example, if you look at the EUR/USD currency pair, you may notice that the price is forming a symmetrical triangle. This means that buyers and sellers are in balance, but one side is likely to gain control soon.
  • Commodity Market: Symmetrical triangle chart patterns can also be seen in commodity markets. For example, if you look at the price of crude oil, you may notice that the price is forming a symmetrical triangle. This means that buyers and sellers are in balance, but one side is likely to gain control soon.

Advantages of Symmetrical triangle

Symmetrical triangle chart patterns are a useful tool for technical analysts as they can provide a great opportunity for traders to take advantage of. Here are some advantages of symmetrical triangle chart patterns:

  • They offer the potential for a reliable entry point into a market trend. As the trendlines of the symmetrical triangle become increasingly convergent, a breakout from the trendline can indicate a good entry point for a trade.
  • They can provide an indication of the direction of future price movement. A symmetrical triangle breakout occurs when the price moves past either the upper or lower trendline. This breakout can indicate a future price trend, such as a bullish or bearish trend.
  • They can also provide a way to determine the size of a trade. As the price of the underlying asset moves closer to the apex of the triangle, the amount of money traders can risk on a given trade can be determined.
  • Finally, symmetrical triangle patterns can help traders to determine possible target prices. Once the breakout has been confirmed, the trader can calculate a target price from the apex of the triangle. This target price can be used to set a profit target.

Limitations of Symmetrical triangle

  • The symmetrical triangle chart pattern is not always reliable, meaning that it can fail to accurately predict the price movement.
  • A symmetrical triangle is not a clear signal of either a bullish or bearish trend, since the eventual breakout could happen in either direction.
  • False breakouts often occur when the price breaks out of the triangle pattern, only to move back within the triangle's boundaries.
  • The symmetrical triangle pattern does not provide any indication as to the magnitude of a price move, making it difficult to trade the breakout.
  • The symmetrical triangle pattern does not provide any indication as to how long the price movement will last.

Other approaches related to Symmetrical triangle

Apart from the symmetrical triangle chart pattern, there are also other approaches related to it.

  • A symmetrical triangle can also be used to identify a trend reversal. If the price breaks out of the triangle in a bullish direction, it can signal that the trend is reversing from bearish to bullish.
  • Symmetrical triangles can also be used to identify potential support and resistance levels. If the price is approaching the lower trendline of the symmetrical triangle, it could be an indication that it is approaching a potential support level. Similarly, if the price is approaching the upper trendline, it could be an indication that it is approaching a potential resistance level.
  • Symmetrical triangles can also be used to identify potential price targets. If the price breaks out of the triangle, the trader can use the size of the triangle to estimate a potential price target. The price target can then be used to decide on a suitable stop-loss or take-profit level.

In summary, symmetrical triangles can be used to identify trend reversals, potential support and resistance levels, and potential price targets. They can be a valuable tool for traders who want to identify entry and exit points in the market.


Symmetrical triangle — recommended articles
Bullish divergence — Uptrend — Bull flag — Bear flag — Gravestone doji — Long-legged doji — Trading channel — Chande Momentum Oscillator — Price pattern

References

Author: Piotr Budz

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