Last Updated on 23 March, 2020 by Therobusttrader
There are quite a lot of trading patterns that try to forecast future price moves. Some are bearish, others bullish, and some could be both, like the symmetrical triangle pattern. So what is a symmetrical triangle?
A symmetrical triangle is a price formation with two converging lines that connect sequential highs and sequential lows. These two lines should have the same slope, not to be categorized as any of the other similar patterns.
This article will guide you to the most common methods used by traders when trading the symmetrical triangle pattern. Here are some things we’ll look at
- Symmetrical Triangle Trading Strategies
- How to place the stop loss and profit target
- Some powerful methods we use to improve on many trading strategies and patterns.
- The exact definition and meaning of the symmetrical triangle
What is the Definition of the Symmetrical Triangle?
We already have established that a symmetrical triangle consists of two converging lines that connect lows with lows and highs with highs. As the two lines converge, the volatility level decreases more and more, until the market finally breaks out of the triangle. This is illustrated in the image below:
In the image above we see how the market breaks out to the downside, which renders this particular setup bearish. In other words, the outcome of a symmetrical triangle is determined by the direction of the breakout!
Now, the exact definition may involve a couple more points. Here they come, one by one:
- The Preceding Trend: If the pattern is to be regarded as a continuation pattern, there must be an established trend that has been going on for at least a couple of weeks. The longer the trend has persisted, the more momentum there is in the market, and the more likely it is that we’ll see a continuation of the trend. However, since the symmetrical triangle doesn’t necessarily need to be a continuation pattern, this criterion is not set in stone. You’ll very likely spot quite a lot of symmetrical triangles occurring in range-bound markets, and in that case, it’s up to the breakout direction to decide whether the pattern is bullish or bearish.
- Two Tops and two bottoms: The minimum number of highs and lows are two each. That’s simply because you need two points to draw a trend line. Still, the more points you can connect, the more significant the levels get, and the more certain you can be that the triangle can be trusted.
- The slope of the lines: The slope of both lines should be roughly equal, which means that the triangle should have its point facing horizontally.
- Volume condition: While it’s not a break or make factor, it’s positive if the volume decreases as the market forms the triangle pattern. It shows us that the market is entering a phase where an increasing number of market participants are becoming unsure of what their next move will be. As a result, it’s more likely that the following breakout will be followed by more people, and end successfully.
- The Breakout: This is what we have been waiting for all the time. Now the phase of decreasing volatility has ended, and the market is looking to start to move to new heights or lows, depending on the direction of the breakout.
Another thing to consider, is where the breakout occurs in relation to the pattern itself. If the market breaks out during the first half of the triangle, the general conception is that it’s not as likely to work out well as if it had broken out during the latter part of the triangle.
This once again has to do with that the decrease in volatility goes to more extremes the longer the triangle has been going on, which makes it more probable that uncertain market players rely on the breakout to take a position in the market.
What Does the Symmetrical Triangle Tell Us About the Market?
Since trading patterns try to quantify the movements of the market, they also tell us a lot about market psychology and may give us a glimpse into the prevailing market sentiment. With that said, let’s look at what a symmetrical triangle tells us about the current situation in the markets. We’ll pinpoint some of the most important aspects of the pattern that you might want to focus your analysis on.
Here is a symmetrical triangle to use for reference:
The slope of the trend lines: In a perfect symmetrical triangle, the upper and lower trend lines are sloping at the same angle, which tells us that bulls and bears are equally strong. After all, bulls make the market reverse from local bottoms at higher and higher levels, while bears make it turn down from local tops at lower and lower levels.
If one of the lines slopes at a higher angle than the other, it suggests that there is an imbalance between buying and selling pressure. For instance, if the upper line comes in at a significantly higher angle of attack than the lower line, it shows us that bears are stronger than bulls, and the other way around. Insights like these can then be used to gauge the likelihood of a breakout occurring to the downside or upside.
The Lenght of the triangle: if the triangle is very long, meaning that the lines aren’t converging at a very high angle, it shows us that the market is obeying strictly under the resistance and support levels created by the two drawn lines. This is a sign that should make us more prone to actually take breakouts seriously once they occur.
The Force of the breakout: The breakout on its own is a sign that one side of the market forces has come out as the stronger party, and therefore is likely to dominate going forward. However, what’s also important to note here, is the force with which the breakout occurs.
If the market just barely breaches the upper or lower lines, it indicates that there isn’t much significance behind the move, which may make us less inclined to actually act on the move.
On the contrary, if the price breaks out in a clear manner under heightened levels of volatility, it suggests that the move might be worth following!
False Breakouts: How to Improve The performance of Symmetrical Triangle Patterns
One of the biggest challenges we face as breakout traders, is false breakouts. As it sounds, a false breakout is when the market goes past the breakout level, and then reverses again, leaving everybody that acted on the breakout with a loss.
There are some methods you can employ to differentiate between false and true breakouts. In this section of the article, we’ll cover a couple of methods that have proven themselves useful to us throughout the years, and that we think could be used successfully to combat false breakouts from triangle patterns.
Just remember that you always should carry out your own analysis to ensure that the type of technique you choose works well with your market and timeframe. We recommend that you use backtesting for this!
With that said we will cover three techniques:
- Volume Patterns
- Adding distance to the breakout level
A gap is when the market makes a move during the night or in between sessions and opens lower or higher than the previous close. Typically, gaps are more common in highly volatile markets, and may give us an indication about the prevailing market sentiment.
For instance, if the market gaps up a lot, it tells us that bulls are in control, which adds to our bullish view on the market.
On the contrary, if there are a lot of bearish gaps, it instead tells us that bearish market forces prevail, which might make us more inclined to look at a scenario where there will be a negative breakout from the symmetrical triangle.
Another thing you could do is to sum all negative and positive gaps of the last 10 bars or so, and divide the sum of positive gaps by the sum of negative gaps to get a ratio. If the ratio is higher than 1, it would suggest that the market is bullish, while a value below 1 would suggest that it’s bearish.
We recommend that you use an Easy coding language to create an indicator of your own that does this for you!
2. Volume Patterns
The default definition of the symmetrical triangle does involve that the volume should be falling as the pattern forms. Still, there definitely is room for additional volume conditions, as long as they don’t contradict the original ones.
For example, you could demand that the final breakout occurs with considerably more volume than the previous price action. In that way, we get a confirmation that the price move, be it bullish or bearish, was carried out with force and conviction, and that market participants have woken up.
3. Adding Distance to the Breakout Level
The perhaps most common method used to combat false breakouts is adding some distance to the breakout level you’re watching. That way you allow the market some room for the random price fluctuations that often trigger breakout systems to go long or short, and could avoid a lot of losing trades.
Just remember that adding some distance also means that there is left less of the move for you to profit from when the market actually breaks out for real. However, in theory, this should be compensated by the lower number of false breakouts.
In the image below you see how we added some distance to the breakout level, and how the market did move above the first breakout level, but not the second. In other words, we avoided a false breakout.
Our guide to breakout trading deals with this topic in more detail.
How Some Traders Trade Symmetrical Triangles
With these aspects of the pattern out of the way, let’s now have a closer look at the steps some traders take when trading symmetrical triangles. This involves everything from spotting the pattern, to deciding where to put the stop loss and profit target.
Step 1: Spot the Pattern
The first step is to find market action that resembles the first stage of a triangle, which can often be trickier than it sounds. Many of the patterns that go undetected look obvious with hindsight, which makes it easy to believe that finding and acting on patterns is easier than it actually is.
In order for there to be a symmetrical triangle forming, you need to have at least two highs and two lows that create the trend lines which together come in the shape of a triangle.
However, the more points that the lines connect, the more significant the pattern becomes.
Step 2: Spotting the breakout
This is a step that we have already covered as well. Here you essentially wait for the market to break away past the upper or lower line, which becomes your entry signal.
Now, many traders choose to not act on the breakout itself, but wait for the market to turn around and then bounce off the triangle line once again. This signals that the breakout level is respected, and makes us more confident that the market will continue in the direction of the breakout.
The image below shows an example o trade with this exact setup. The market breaks up above the triangle, turns down shortly thereafter, and then bounces up again.
Step 3: Placing the Stop Loss and Profit Target
In general, you should always plan your stop loss and profit target levels before you enter a trade, not to be affected by trade-related emotions as you decide your exits.
Luckily there are some predetermined rules that apply to triangle patterns specifically.
Of course, they should not be taken for granted all the time, as is the case with anything in trading, but it could at least serve as inspiration for finding appropriate levels to place the stop loss and profit target.
- The estimated target price of a symmetrical triangle is the distance of the widest part of the triangle added to the breakout level.
- The stop loss is usually placed slightly below the breakout level. It’s important to not have it placed too tight, so that it’s not hit accidentally by some random market swings.
The image below shows the placement of both the stop loss and profit target.
Even though these methods of deciding where to place to stop loss may be popular, do remember that they might not work everywhere. We recommend that you have a look at backtesting, which lets you simulate the performance of various rules on historical data, in order to find out what has worked best.
Symmetrical Triangle Vs Pennant
Those of you who know about the pennant pattern might be asking yourselves what the differences between pennants and triangles are. Well, even if both patterns are quite similar when it comes to their shapes, there are two big differences:
- The Duration of the Pattern: Pennants are very short term patterns that often don’t last longer than one week. On the contrary, triangles typically last from one week up to several months, and sometimes longer.
- The Expected Outcome: Pennants are continuation patterns that occur in an ongoing trend, while the meaning of symmetrical triangles is determined by the direction of the breakout.
In some cases, you will find that it may be very hard to distinguish between the two patterns. As a result, it’s quite common that they’re used interchangeably.
In this guide to the symmetrical triangle pattern, we have had a closer look at how you should go about to implement the pattern in your own trading, in accordance with the traditional interpretation. You’ve also been presented to a couple of techniques that we have used in the past to improve on strategies, and that could work well with the symmetrical triangle pattern.
As a last piece of advice before ending this article, we just once more wanted to stress the importance of always validating your strategies and setups before going live. Unfortunately, most people don’t do this and lose money as a result.
In the following two articles, you may learn more about how to test and validate trading strategies: