Triangle Chart Patterns: Types, Formation & Trading Strategies

Triangle patterns are functional technical analysis patterns that help traders identify zones where a stock might be consolidating but could break out. So, triangle formations fall under the continuation pattern when the stock is looking to make a further move after a brief sideways phase. Triangle formations have been seen to work across asset classes, including stocks, indices, and commodities, and across time frames, including intraday and daily.

Types: Ascending, Descending, Symmetrical

There are three major kinds of triangle patterns:

Ascending Triangle:

This pattern appears when the market is already in a bull run but encounters temporary resistance. Rising support levels mark these, and the break of the resistance can offer further bullish bias.

Descending Triangle:

These patterns appear when the market is already in a bear trend but encounters temporary support. Declining resistance levels mark these, and the break of the support can offer further bearish bias.

Symmetrical Triangle:

This is very interesting, because here both the upper (resistance) and lower (support) lines are converging trendlines. This looks like a volatility contraction, and a breakout is possible either way.

Here is the anatomy of the three types of triangles:

Market Psychology Behind Triangle Patterns

The market psychology in all three patterns is that of volatility contraction. In the case of ascending triangles, buyers are in charge and encounter temporary resistance. This leads to profit-booking, and sellers try to push the price down. After a brief pullback, buyers try to push the price back up, but are met with sellers at the same resistance zone. However, this time, the sellers are unable to push the price very far, leading to rising support levels. This shows that the sellers’ strength is weakening, and eventually, in the third or fourth try, the buyers can break through the resistance zone and continue their upward momentum.

In the case of descending triangles, the sellers are in charge and are met by a temporary support. This leads to profit booking, and buyers try to push the price higher. After a brief pullback, sellers try to push the price down again, but are met by buyers at the same support zone. However, this time the buyers are unable to push the price very far, leading to declining resistance levels. This shows that buyers' strength is weakening, and eventually, in the third or fourth try, sellers break the support zone and continue their downward momentum.

The symmetrical triangle pattern works like a spring. Both buyers and sellers are trying to gain the upper hand, which is leading to rising support and declining resistance levels. Finally, one of the side breaks through and makes an explosive move. 

How to Identify Each Type of Triangle Pattern

To identify the triangle pattern, use a minimum of 2-3 touchpoints on either side of the trendlines. Once both the support and resistance trendlines are in place, we can create the triangle. Check the slope of the upper and lower boundaries. 

• Ascending: If the upper trendline is horizontal, and the lower trendline is slanting up
• Descending: If the upper trendline is slanting down, and the lower trendline is horizontal
• Ascending: If the upper trendline is slanting down, and the lower trendline is slanting up

It is important to note that the following are not considered triangle patterns:

• If the upper trendline is slanting up, and the lower trendline is slanting up
• If the upper trendline is slanting down, and the lower trendline is slanting down
• If the upper trendline is slanting up, and the lower trendline is slanting down

These are, in fact, called wedge patterns

Trading Strategies Based on The Type of Triangle Pattern

Triangles are considered continuation patterns. So the previous trend should be checked to determine the expected movement. Here are the general rules:

• If the prior trend is upward and an ascending triangle forms, traders can place a Long on the breakout of the resistance level.
• If the prior trend is downward and a descending triangle forms, traders can place a Short on the breakout of the support level.
• In the case of a symmetrical pattern, traders can trade in the breakout direction directly. 

Risk and Breakout Management

Risk management is of utmost importance when trading the triangle. The usual method of putting a stoploss is based on the previous swing. 

• In an ascending triangle, the buy entry is triggered when the resistance level is broken. The stoploss is the previous swing low created on the rising support zone.
• In a descending triangle, the short entry is triggered when the support level is broken. The stoploss is the previous swing high created on the declining resistance zone.
• Similarly, in the case of a symmetrical triangle, depending on whether the trade is taken at the upper or lower level, the stoploss is the previous swing point.

Triangles are known to give good risk-to-reward trades. So traders can try for 1:2 or even better, based on their confidence. 

Examples from Different Assets

Here are some examples of a triangle pattern. Let's see how the symmetrical triangle works:

This is the daily chart of Suzlon. A clear symmetrical triangle is created with three touchpoints at the top and three touchpoints at the bottom. We can see that the resistance line is declining and the support line is going up.

As a trader, look for the breakout of either side. In this case, it gave the breakout of the resistance, so a Buy trade is triggered. The stoploss is the previous swing low, and the target can be 1:2 risk-to-reward.

Let's take an example of a descending triangle on the daily timeframe on TCS:

We can see that there are again 3-4 touch points on support and 3 touch points on resistance. The support is horizontal, and the resistance line is declining. So traders can anticipate a down move. The trade happens, and the next day the market gaps down, quickly reaching the 1:2 target within 10 days.

Pros and Cons of Triangle Patterns

Pros

The Trading Triangle pattern has a lot of benefits, such as:

• It is relatively easy to spot on charts.
• The pattern has been shown to work across timeframes.
• Provide a clear entry/exit with stoploss and target.

Cons

However, traders should be careful while trading the pattern because: 

• Not all trades are profitable. It can produce false breakouts.
• The reliability depends on volume and trend context (prior trend)

Conclusion

The triangle patterns show great accuracy in predicting the market direction. They can compress price action before strong moves. With proper identification and sound risk management, traders can create profitable opportunities with high accuracy.

Also check: Advanced Option Chain | Double Bottom Pattern | Double Top Pattern | Evening Star Pattern | Morning Star Pattern | Hammer Candlestick Pattern