In this lesson, we’ll look at one of the most well‐known technical‐analysis formations: the Symmetrical Triangle. It often appears on price charts of various financial instruments and typically suggests a continuation of the prior price move.
Characteristics of the Symmetrical Triangle
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Formation:
Created by two converging trendlines that meet at a point. The upper line connects a series of lower highs, and the lower line connects a series of higher lows. -
Turning Points:
At least two highs and two lows are required (points 1, 2, 3, and 4) to define the triangle. -
Volume:
Volume should contract as the triangle forms, indicating waning market activity and investor indecision.
Signals Generated by the Symmetrical Triangle
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Buy Signal:
Occurs when price breaks and closes above the upper trendline. Ideally, this breakout is accompanied by a noticeable increase in volume. -
Sell Signal:
Occurs when price breaks and closes below the lower trendline. -
Ideal Breakout Zone:
The breakout should take place when the price is between 50% and 75% of the triangle’s height (measured from the first turning point to the apex). This helps avoid false breakouts and increases reliability.
Expected Move after Breakout
The price move—upward or downward—after the breakout should be at least equal to the triangle’s maximum height.
Trading Tactics
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Position Holders:
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On an upside breakout: Consider selling into strength at the breakout, then potentially repurchasing on a pullback if volume confirms the breakout.
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On a downside breakout: Sell immediately.
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Non‐Holders:
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On an upside breakout: Wait for the pullback after the initial breakout and confirm with rising volume before entering a long position.
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Summary
The Symmetrical Triangle is a powerful tool for experienced traders, allowing early identification of potential trend continuations or reversals. Always watch volume at the breakout as additional confirmation of the move’s strength. Even though triangles often signal continuation, you should employ strict risk management—setting stop-loss orders to protect your positions.
