Summary:
A symmetrical triangle pattern is a type of chart pattern that can be a useful tool for traders. However, they should know and understand the intricacies of the symmetrical chart pattern before delving into trading. This article can help you understand the pattern and highlight its chief features.
When you look at the price chart of a stock, it may appear like the lines are zig-zagging in completely random patterns. True, but hidden within those price lines are chart patterns and geometric shapes that are crucial in understanding the price action as well as making predictions of price movement and volume.
There are many types of chart patterns. If you learn to recognise these patterns early, you can gain a significant competitive advantage in the market. Symmetrical triangle pattern is one of them you should know about. So, let us jump right in and learn more about the symmetrical triangle pattern.
What is a symmetrical triangle pattern and how to spot one?
In a stock chart, a triangle is formed by drawing two lines - one that connects the upper trend and another that connects the lower trend. When these two lines converge, you will get a triangle pattern. Triangle patterns are considered continuation chart patterns, which means that when the breakout price forms, it is most likely to continue trending in the same direction. There are three triangle patterns – ascending triangle (bullish), descending triangle (bearish) and symmetrical triangle (continuation pattern.)
A symmetrical triangle is one where the upper trend line and the lower trend line slope at almost equal angles over a series of peaks (highs) and troughs (lows) to converge at a point in the centre. They connect at least two highs and two lows forming a shape that resembles a “greater than” symbol or a funnel.
Having the symmetrical triangle pattern in your toolkit is like having a handy trick up your sleeves. However, to trade successfully in this pattern you need to formulate a strategy. Most importantly, you must learn to identify the pattern and understand its pros and cons.
Identifying a symmetrical triangle pattern
Not all trend lines indicate a symmetrical triangle pattern. Here are some of its key indicators:
- Trend timeline: An established trend that has been observed for a period of a few months and not days or weeks.
- Four touch points: There should be a minimum of four points touching- two highs by the upper trend line and two lows by the lower trend line.
- Volume: As the symmetrical triangle pattern indicates the consolidation of prices, the volume of trade decreases as the period extends.
- Breakout direction: The direction in which the breakout occurs can only be determined post the breakout point.
The symmetrical triangle pattern occurs when the market is taking a breather in anticipation of either the continuation of the ongoing trend or a reversal. It’s best to use this pattern to anticipate a potential breakout or breakdown. Often, the breakout would continue in the direction of where it was formed. That means if there was a bullish trend, then the predicted price would likely be in the upward direction and a bearish trend would mean a downward direction.
Calculating the breaking point from a symmetrical triangle pattern
You can estimate the breakout price point using the distance between the high and the low in the early parts of the pattern. For instance, if the triangle pattern starts at ₹100 and continues to move upward till ₹150, let us assume the breakout at ₹120 before the range of highs and lows begins to narrow. Using the formula 150 – 100 = 50 + 120 = 170, we can predict ₹170 to be the target price.
Trading the symmetrical triangle pattern – Do’s and don’ts
It is important to manage risks and protect your capital while trading with a symmetrical triangle strategy. Here are some important points to keep in mind.
- Confirmation: Enter a trade only after a confirmed breakout or breakdown.
- Use the 1% rule: This means resulting in less than 1% risk to your account balance in one short position trade.
- Volume: Ensure the breakout or breakdown is followed by increasing trade volumes.
- Stop loss order: Estimating a breakpoint will help you place your stop loss order at the right place to minimise potential losses. Placing the stop loss order below the breakout point or above the breakdown will limit potential losses.
- Price target: As mentioned above, estimating the breakout point will allow you to place your stop loss order and provide an initial target for the trade.
It is also important to keep in mind that incorporating other technical indicators such as a moving average or a momentum indicator to infer the breakout point will be your best bet while trading the symmetrical triangle pattern.
To sum it up
The symmetrical triangle pattern should be used to anticipate a continuation of an ongoing trend or a reversal. The key is to identify it and predict where the breakout might happen to reduce potential losses. You must also place stop loss orders below breakout point or above breakdown point to mitigate risks. Moreover, incorporating other technical indicators such as moving average or momentum indicator will enable a more accurate prediction.