Introduction to the Stock Market_7. Chart patterns_ Symmetrical triangles

Lesson 7: Chart patterns. Symmetrical triangles

Definition

A symmetrical triangle is when prices converge towards a central point. This
happens because the bulls and bears are both at a decision point.
The bears are absolutely sure that the prices are going to fall.
The bulls are absolutely sure that the prices are going to rise.

Whether that happens or not is an open question. A pattern does not develop
because people want it to; it happens because of objective situations.

On this chart, every time the market rallied, the bears started selling.
Every time the market dipped, the bulls bought.
It turns out that every new sequential peak is lower than the last, giving us the upper
trendline (the red line going down); and every new sequential trough is higher than
the last, giving us the lower trendline (the red line going down).

Once you’ve reached the end of the pattern, the edge of the point, a decision needs
to be made.
Suppose we’re in an uptrend, and we get a continuation pattern. We know that the
markets need to continue up, so if we break out, the bears who were short selling will
now start to buy, further fueling the rise.

Breakdown

A symmetrical triangle is the most common triangle chart pattern. It is comprised of
price fluctuations where each swing high or swing low is smaller than its
predecessor. This coiling price movement creates a structure of a symmetrical
triangle. As a symmetrical triangle is forming, trading activity diminishes along the
way until the apex of the triangle is reached.

Many technicians believe that if a stock is rallying prior to a symmetrical triangle, the
stock will eventually breakout to the upside. Conversely if a stock is falling prior to a
symmetrical triangle forming, the stock should continue lower. Both of these
assumptions are wrong. Symmetrical triangles provide little, if any indication as
to which direction the stock will ultimately breakout. Remember from the above

definition, there is a lack of volume and price movement which creates a coiling
pattern, therefore it is simply impossible to assess which way a symmetrical triangle
will inevitably breakout.

● Symmetrical Triangle Breakout
There are two key components to a symmetrical triangle breakout: price and
volume. For a breakout to the upside, you want the stock to close decisively outside
of the triangle formation with a pickup in volume. Breakouts to the downside also
require a decisive price break of the formation, but the volume does not need to
display a significant increase in activity. If you notice a pickup in volume on a
breakdown, odds are it is a false signal and the stock will likely reverse to the upside.
Symmetrical Triangle Breakout Chart Example

Above you see a classical example of a symmetrical triangle on a chart. If we draw a
horizontal line through the right edge of the triangle, we will divide its angle into two
equal parts. This is the requirement we need in order to confirm this pattern on the
chart. Also, notice that the lower level of the triangle starts later than the upper level.
In a real symmetrical triangle on a piece of paper, the two sides need to be equally
long. However, on a chart this is impossible. The reason for this is that the stock
price is unable to draw a top and a bottom at the exact same time. After all, the
x-axis on every stock trading chart refers to time.

Also, notice that the initial symmetrical triangle breakout on the image is bearish. The
price first breaks the lower level of the formation. However, the price then switches
directions and breaks the upper level of the triangle with a big bullish gap which
comes with the new trading day. This is a normal outcome when trading triangles –
especially the symmetrical triangle. After all, the direction in which the triangle will
break is unknown before the appearance of the triangle. For this reason, if you see
the price peeking through one of the levels, this doesn’t mean that you have a
breakout. In many of the cases it might be better to wait for the price to develop,
before concluding that there is a breakout.

● Identifying the Real Breakout

A great trading tool for spotting real breakouts is the volume indicator. The reason
for this is that real breakouts usually happen during high trading volumes and high
volatility. The fake breakouts appear during low volumes and they look more like a
range rather than a breakout. Since the levels of any triangle are inclined, a ranging
move sometimes brings the price outside the frames of triangles. This way traders
get lured into thinking there is a breakout on the chart. Let me show you how to spot
real symmetrical triangle breakouts with the help of the volume indicator.

● Symmetrical Triangle Pattern

Above is a 5-minute chart of General Motors from May 12, 2015 where a
symmetrical triangle developed over an entire trading day.
In the red circle we see a fake breakout. Notice that the volumes during this
breakout are relatively low and stay low over the next few periods. Later on we see a
bullish breakout when the trading volumes are increasing. This is the real breakout
which should be traded.

● Symmetrical Triangle Target

Every chart pattern you trade should “tell” you what your target is for the trade. The
reason for this is that chart patterns have a target, which is well known to the more
experienced traders. Remember this: When you trade chart patterns, your minimum
target equals the size of the pattern itself. This is an important rule which should
always be in your mind when you trade chart formations. The symmetrical triangle
formation is no different.

In order to measure the symmetrical triangle size, you first need to extend the
shorter side to match the length of the other side. The size of the third side of the
triangle (which is missing) is the size of the price move you should pursue. If you are
getting confused, the image below will help you understand the size of the
symmetrical triangle chart pattern.

● Symmetrical Triangle Price Target

Above is the 2-minute chart of Citigroup from April 14, 2016. The blue lines on the
chart form the symmetrical triangle. However, I have added an extension of the
upper level – the red line on the chart. This way, we can measure the third side of
the symmetrical triangle.
Have a look at the arrow on the green area between the two sides of the triangle. Its
length is $0.46 (46 cents). We take this length and we apply it right after we identify
the breakout in the formation. This is the minimum target we should pursue when
trading the pattern. In this case it appears that we have a symmetrical triangle
reversal scenario.
Stay with us for the next lesson will fully explain how to trade symmetrical triangles.