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I am sure you have heard about chart patterns in Forex trading and their
relation to technical analysis. You probably know about Double and
Triple Tops, Head and Shoulders, or Rectangles. In order to have a
complete understanding of chart pattern trading, we should also gain a
good understanding of one of the most common on-chart formations.
What I referring to are the triangle trading patterns. So in this lesson, we
will discuss the basic triangle formations and some ways to properly
identify and trade these patterns
There are different kinds of triangles that can be seen on a Forex chart.
Before you jump into triangle trading you should understand the
difference between the formations. We will now take a closer look at the
various triangle chart patterns and the corresponding trade setups. Once
you are equipped with this knowledge, you should be able to add a
triangle trading strategy to your trade setup arsenal.
Ascending/Descending Triangle
These types of triangles have one flat horizontal side, and one sloping
side, which is moving toward the flat horizontal side. The Ascending and
Descending Triangle patterns are a mirror image of each other. They are
identified as Ascending or Descending depending on which side is the
flat horizontal side, and which side the slope is on.
This triangle pattern has its upper side flat, and the lower one ascending.
In this manner, the tops of this triangle are on the same level and the
bottoms are increasing. This type of triangle typically has a bullish
character. When you spot this triangle on the chart, you should be
prepared to catch a bullish price move equal to at least the size of the
triangle. In this manner breakouts through the upper level (the flat side)
are used for setting entry points for long positions. This is a sketch of the
ascending triangle chart pattern:
The black lines above indicate the price action within the triangle
formation. The blue lines refer to the sides of the triangle, which
contains the price action. The red lines correspond to the size of the
triangle and its potential target, which is typically a 1:1 measured move.
Rising/Falling Wedge
The rising and falling wedges are similar to the ascending and the
descending triangle patterns. However, the rising and the falling wedges
have no flat side. Both sides of the wedges are sloping in the same
direction. Lets describe the two kinds of wedges you will find on the
price chart.
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Rising Wedge
This is a triangle chart pattern, where both sides are inclined upwards.
The price creates higher tops and even higher bottoms. This causes the
two ascending lines to interact, creating a type of triangle pattern on the
chart. The rising wedge has a strong bearish character. In this manner,
the trigger side of the wedge pattern is the lower line. When you spot a
breakout through the lower level of a rising wedge, you should expect a
sharp price drop equal to at least the size of the pattern. Therefore,
breakouts through the lower level of a wedge are used for opening short
positions. This is what the rising wedge formation looks like:
Falling Wedge
With the falling wedge pattern, both sides are inclined downwards. The
price creates lower bottoms and even lower tops. In this manner, the two
sides of the triangle are descending and contract to a tight point.
Opposite to the rising wedge, the falling wedge has a strong bullish
character. Therefore, the trigger side of the falling wedge formation is
the upper line. When the price breaks the upper level of a falling wedge,
you should aim at for a bullish move at least as large as your wedge
formation. As such, traders use the falling wedge to set long entry points
on the chart. Below you will see a sketch of a falling wedge:
Now that you know what the rising and the falling wedges look like, we
should share one more detail regarding these formations. Wedges could
have trend continuation, or trend reversal character. When the wedge
appears after an extended price move, we expect a reversal of the trend,
when the wedge appears earlier in the trend, we expect it to be a
temporary retracement that will continue the main trend in place.
Typically the more powerful wedge formation is the potential trend
reversal formation which occurs after a prolonged trend move.
Symmetrical Triangle Pattern
The symmetrical triangle is a situation on the chart where the tops of the
price action are lower and the bottoms are higher. Also, the two sides of
the triangle are inclined with the same angle. This creates the
symmetrical character of the triangle.
Pennants
Bearish Pennant
As you have probably guessed, the bearish pennant is the mirror image
of the bullish pennant. Bearish pennants start with a price decrease and
end up with a symmetrical triangle appearance. Since pennants have
trend continuing character, bearish pennants are likely to continue the
bearish trend. When the price goes through the lower level of the bearish
pennant, you should first look to capture the first target, which is equal
to the size of the pennant itself. When the price completes this target,
you can then try to catch the expected further decrease, which is equal to
the size of the previous leg or .618 of that leg. Refer to the image below
for a Bearish Pennant:
Expanding Triangle
You can hardly mistake an expanding triangle on the chart. The reason
for this is that it has very unique parameters. Both sides of the expanding
triangle are inclined, but in opposite directions.
The direction of the potential price move of this chart pattern is very
tricky to determine. Therefore, we will now introduce a few rules, which
will help you to identify the direction of the expected price move.
Symmetrical Lines
If the two sides of the expanding triangle are increasing, then the pattern
is likely to have bearish character.
Decreasing Lines
If the two sides of the expanding triangle formation are decreasing, then
the figure is likely to have bullish potential.
If the tops of the price action are increasing, but the bottoms are
decreasing with higher intensity, then the pattern has bearish character.
On the contrary, if the bottoms are decreasing, but the tops are
increasing with higher intensity, then the pattern is likely to have bullish
character. In other words, you should trade in the direction of the side,
which has higher inclination.
The chart starts with a big symmetrical triangle. The price creates three
decreasing tops and three increasing bottoms on the chart. The red
arrow in the beginning of the triangle measures its size. As you see, the
same red arrow is applied when the price breaks the upper level of the
triangle. The red arrow indicates the potential target of the pattern,
which gets completed after a week.
Meanwhile, on the way up the price action creates a rising wedge chart
pattern. As we discussed, the rising wedge has bearish potential. With
the the breakout through the lower level of the wedge we notice a minor
correction. (yellow arrows)
At the end of the bullish tendency the price creates another symmetrical
triangle. Later on the price breaks through the lower level and completes
the size of the pattern (pink arrows).
While decreasing, the price action actually creates a bearish pennant.
This is the consolidation after the first impulse of the bearish trend. The
price breaks the lower level of the pennant afterwards. On the way down
we see the price completing the first target, which equals the size of the
pennant (red arrows). Then the decrease continues and the decrease is
extended to a size equal to the previous leg. (green arrows).
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Conclusion
You have a contracting triangle on the chart when the tops and the
bottoms of the price action are moving toward each other.