Triangles are usually continuation patterns, so we should already have an established trend before trading them. Triangles come in three types: symmetrical, ascending, and descending triangles. We will examine each pattern separately, starting with the symmetrical triangle.
The Symmetrical Triangle
The symmetrical triangle marks a consolidation period after the market has been trending for a while. Since this formation is a trend continuation pattern, the first condition that needs to be satisfied is a prior established trend. The symmetrical triangle is a bullish pattern if the previous trend has been up. Expect the bulls to break the top side of the triangle and push prices higher. Conversely, the symmetrical triangle is a bearish pattern if the prior trend has been to the downside. In this case, a break to the downside is more likely.
The pennant, another chart pattern we will be covering, looks very similar to the symmetrical triangle. The main difference between the two is that in the case of the pennant, the prior trend is very fast and near vertical, resembling a flagpole. We will look at this formation in another tutorial. On the other hand, the trend before the symmetrical triangle is slower and more established; it does not have to look like a vertical line.
Aside from an established trend, more conditions need to be met before classifying a pattern as a symmetrical triangle. Let us demonstrate these with an example. The chart below shows a symmetrical triangle in the US30 (Dow Jones Index).
We can see that the US30 is already in an uptrend, satisfying criterion number one, which means that the symmetrical triangle on our chart is a bullish pattern. Next, we need at least 2 points on the high end (trend of lower highs) and 2 points on the low end (trend of higher lows). We then use these two points to draw one trend line connecting the highs and one line connecting the lows. Ideally, you would want to see three or more points on each side, as in our example below.
Each successive high should be lower than the previous high, and each low should be higher than the previous low. The connecting highs should produce a trend-line that slops down. Conversely, the connecting lows should give us an upward sloping trend line. We now have our symmetrical triangle.
Entry, Stop Loss, and Target
The entry for the symmetrical triangle pattern is at the break of the triangle. To have better odds, you should trade breakouts that occur in the direction of the previous trend. In our US30 chart above, the prior trend was up, which means that we will only look for long (buy) trades.