A triangle is one of the patterns, which can be often seen on the price chart. As a rule, it is a sign of increasing volatility in the market.
When we can see the narrowing of the triangle it means that there is a lull in the market, which is often followed by the surge. A triangle is a pattern showing uncertainty, indicating a trader that during the period of its formation the market is uncertain and it is not clear at what direction the price will move.
However, although this pattern does not show a clear picture of the market, a strategy based on this pattern is very popular among traders. So, how to correctly build a triangle on the chart and gain profit from trading with its help? We will talk about this in this article.
Types of triangles and how to build them up
On order to form a triangle, we need four points: two price peaks and two price dips. After connecting these points we will have one of these patterns on the chart:
- Ascending triangle: The top line is horizontal or it may have a minor inclination, the bottom line is directed upwards.
- Descending triangle: The bottom line is almost horizontal or has a minor inclination; the top line is directed downwards.
- Equal triangle: The sharp angle is pointed to the right; the lines are not horizontal.
Note that a triangle pattern is often confused with the «wedge», which is built on the same principle, but unlike the triangle, it always has a clear direction, that is, the inclination of both lines.
It is advisable to build a triangle pattern on the timeframes higher than the hourly one, entry points can be searched on the timeframes of 30 or 15 minutes.
Some traders believe that the price usually breaks down the horizontal line of a triangle, but this opinion has not been confirmed and in practice, after the formation of this pattern on this chart, the price can move in any direction.
There are no certain rules of how to enter the market, because it depends on the trader’s trading methods; however the signals can be divided into conservative and aggressive ones.
Aggressive entry into the market occurs at the time of breakdown of the triangle line, while in case of the conservative entry, a trader waits when the candlestick closes below the signal line. The chart above shows an example of the aggressive sell signal; in case of the conservative entry in this situation part of the profit would have been missed.
In this situation it is recommended to use the widest point of the triangle for placing take-profit order. A trader can draw a mirrored pattern of the triangle on the chart and its lower part will be the point of placing a take-profit order. Stop-loss will be placed at the distance constituting one third of this distance.
A trader can also place a stop-loss order on the side of the triangle, which is opposite to the side of the breakdown.