Symmetrical triangles are one of the most popular stock chart formations employed by investors who follow technical analysis. With their very low failure rate, symmetrical triangles offer you an extra edge to help beat the market. Be sure to add symmetrical triangle patterns to your technical analysis tool bag.
Symmetrical Triangle Chart Pattern
A symmetrical triangle can form within a larger uptrend or downtrend. Symmetrical triangles appear when the price form lower highs and higher lows. The two sloping trends that form a symmetrical triangle intersect at some point. The breakout can be either up or down. There should be at least two touches of the rising trend and two of the descending trend to form symmetrical triangles. A typical symmetrical triangle lasts from two to five months on a daily chart.
This trading pattern comes from buyers and sellers’ behavior who cannot seem to make up their minds on the direction the share price will go. After reaching a high, the price turns down, consolidating some of the gains. Then buyers step in and push the price up again. This time the price does not reach the prior high before it once again turns down. On the way down, investors start to buy before the price reaches the recent low, and the price once again turns up. This trading pattern continues with lower highs and higher lows as investors struggle to discern the new longer-term trend. Volume tends to diminish as the pattern forms. Eventually, the price breaks up or down, and a new trend begins. The break up or down, is accompanied by above-average volume as investors jump on the bandwagon to ride the latest trend.
The descending trend forms when the price rises to that level at least twice. The price does not have to actually touch the descending trend, though it should come close. This trading action comes from the behavior of sellers who overcome the buying volume when the price begins to rise. The selling overcomes the buying interest, and the price stops before reaching the prior high creating lower highs.
Just the opposite takes place on the lower side of the formation. On each dip, the buying overcomes the selling at a higher low as interest in the stock grows. These higher lows form the rising trend.
The rising trend of the symmetrical triangle is defined by at least two price declines creating higher lows. While the price does not have to touch the rising trend, it should come close as this is an indication of the underlying buying strength of the stock price pattern.
Volume declines typically over the life of the symmetrical triangle chart as both buying and selling pressure tends to diminish. This decrease in volume helps to open the door to the breakout. Breakouts take place when the price closes below the rising trend or above the descending trend. Ideally, the breakout is accompanied by higher volume, as volume has trended down as the symmetrical triangle formed.
Breakouts on a symmetrical triangle pattern should take place more than halfway through the formation of the triangle and before reaching the apex.
Often the price will re-test the breakout trend line, giving investors another opportunity to enter.
The example below is of the S&P 500 Index. It shows the formation of a symmetrical triangle with volume declining over the life of the pattern.
The breakout that began on September 9, 2010, is with below-average volume indicating buyers are not on board. A successful break can still occur without volume though it tends to have a much lower probability of success.
The chart is as of the date of the article. I will be updating this chart and the result as time goes by.
Trading Symmetrical Triangle Chart Patterns
When the price pierces either of the trend lines that form the symmetrical triangle, we have a breakout (up) or a breakdown. Ideally, we will see above-average volume as traders are buying or selling depending on the direction of the break. We can have a successful break from a symmetrical triangle without an increase in volume. However, without the volume, we have a lower probability of success resulting in more failures.
Investors should look to buy on the initial break. However, you can also wait for the re-test as another re-entry point. Unfortunately, the re-test does not always take place, so you cannot count on it.
Some investors use the measured rule to estimate the gain they expect when they trade the symmetrical triangle. In this case, the measured rule takes the difference between the high and the low when the symmetrical triangle began and adds that difference to the top of the triangle for a breakout target. On a breakdown, you subtract the difference from the symmetrical triangle’s low to identify the target for a breakdown.
For the chart above, the high at the beginning of the chart is approximately 1,220. The low is 1,020 resulting in a difference of 180 (1,220 - 1,020 = 200). Should the pattern break out the target is 1,220 + 200 = 1,420. The target on a break down is 1,020 - 200 = 820.
The top of the symmetrical triangle is another target that could be used to sell half of the position on a breakout. That way, you capture some profits, and with a stop above where you entered, you are assured of even more gain. It is a good trading strategy. In this case, the target is 1,220.
The same holds for a breakdown. Sell half of your position at the low of the symmetrical triangle and let the rest run with a trailing stop that protects your remaining profits. The first target is 1,020 on the downside.
As with all investments, be sure to set your trailing stops, either with your broker or mentally. In the case above, a good initial stop would be at the point of the break or at the low for September 2010. Should the price continue to rise, let the stop rise with it, protecting your capital and eventually your profits.
Risks using Symmetrical Triangles
Your symmetrical success triangles align closely with entering on a break through either the resistance formed by the descending trend or falling through the rising trend’s support. The symmetrical triangle pattern is subject to premature breaks that can catch an investor off guard, especially when volume does not accompany the breakup.
According to Thomas Bulkowski, in his book Encyclopedia of Chart Patterns (Wiley Trading), premature break downs occur 16% of the time, while premature breakouts (up) only happen 3% of the time. The volume on a premature break out averages 88% of the 25-day average volume, a good indication that the break up may not be one to try.
Volume on premature break downs averages 116% of the 25-day average volume, meaning it is more difficult to use volume as a sign the breakdown is real or a false move.
As with any chart pattern, be sure the symmetrical triangles fit the basic criteria before making a commitment.
When all the factors are in place, symmetrical triangles are excellent patterns to follow. They have a relatively low failure rate and meet their targets on a regular basis.
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