Ascending, Descending and Symmetrical Triangles - Technical Analysis


Generally, a formation of triangle pattern is considered to be a continuation or consolidation phase in the journey of a stock price. Ascending, Descending and symmetrical triangles are a very commonly occurring chart patterns in a chart. These patterns can suggest four events likely to occur.

 1. A continuation of the trend.
2. A consolidation phase.
3. A reversal of the existing trend.
 4. A neutral phase. 

The Symmetrical triangles can be considered neutral, while the ascending triangles are bullish in nature. The descending triangles are generally bearish. When we analyze a chart pattern and identify these patterns we can notice that they do not last for longer periods. They are patterns after appearing for days or weeks give way to a new trend.

What is an ascending triangle?
The chart posted here is an example of ascending triangle.

When the buyers and sellers are uncertain of the market direction they try to grab whatever the opportunity they come across and register the gains too quickly. This action of the buyers and sellers will create trendlines with narrow support and resistance. Eventually we can see a pattern which resembles a triangle. 

In short the ascending triangle could be described as two trendlines drawn from a left sided base. The two trendlines converge to form a triangle. The top side of the triangle could be nearly flat or slightly ascending. In an ascending triangle we can note the price band moving almost within the triangle.

What to look for in an ascending triangle pattern?
The first thing to look for in an ascending triangle pattern is possibility of a breakout. Another prominent feature in ascending triangle is the price movement. The price will hit the upper band on several counts. It will also hit the bottom tend line on several counts. The triangle’s flat top shape indicates the sellers are not winning in pushing the price beyond certain level. This also indicates a continuous supply is available at that price range. When the supply levels deteriorate the upper trend line will be violated at a quicker phase, with higher volumes. This is what we mean by breakout. Since the price was hovering around a tight trading band, the traders when sensing this may buy in large quantity. As a result we see the price of the stock moving rapidly on the upper side. How far the price can move? Can a target be identified?  When it comes to predicting the breakout, the height of the ascending triangle plays an important role. To a larger extend we can fix a target which is known as technical target price. The technical target price is calculated by adding the height of the triangle (or the price range) to the converging ends of the trendlines. The chart I have attached has detailed explanation.
There are some points that should be noted when it comes to reading the ascending triangles. Sometimes it may produce false patterns – giving out premature breakouts. In this case the volume levels are to be followed. If the volume does not pick up along with a breakout the pattern should be approached cautiously. These erratic movements of price can correct itself in a few days. Therefore wait and watch approach is advised.

Descending triangles are an indication of bearishness in the market. Like the ascending triangle the formation of descending triangle takes its time to form and can last for weeks or months depending on the market conditions. Like the ascending triangle the descending triangle too is a considered as an intermediate pattern.

What is a descending triangle?
The chart posted here is an example of descending triangle.

Converging trendlines of upper resistance level and support levels forms the shape of this pattern. From the chart reader’s point of view the buyers and sellers cannot come to terms with where the market is headed. This uncertainty is compelling them to quick decisions to make money. Due to this factor the price band does not move beyond a certain range. Quick selling makes the market move downwards.

What to look for in a descending triangle?
The most prominent feature to look for in a descending triangle pattern is the occurrence of a Breakdown. This can happen when one of the trend lines is broken and the share price takes a decisive course triggering a new trend. In other words the sellers are more aggressive than the buyers.
The height of the descending triangle can give some clues to the technical level where the share price may be heading. The measurement of the height is deducted from the point where the breakdown begins, and a technical price level is predicted. However this prediction of technical price level has to be viewed with caution, because on the downside a stock is said to be less likely to strike its expected target. Once the break down begins the price of the stock will fall rather rapidly. The trader has to keep watching the volume levels. The variation of the price should be supported by large volumes, which indicates the selling pressure. Normally the breakdown after a descending triangle formation the volume levels may be higher than ascending triangle breakouts.

One point to note is the price breakdown has to happen after the trend lines merges. Any break down before this point needs to be looked at with caution.
Another point is minor pullbacks which can happen, based on news and rumors. The trader has to be aware of this factor.

Ascending and descending triangle patterns are regarded as very valuable and reliable in a chart, because it clearly indicates two aspects of a market – the supply and demand. When there is an imbalance in the supply and demand chain, there could be panic in market especially in down trending market. We often witness investors hitting the panic button whenever this supply and demand level is mismatched.

On the other hand the ascending triangle gives the trader community ample opportunity to find entry points and profit targets.



Symmetrical Triangle 
A triangle appearing in a chart generally indicates a continuation or consolidation pattern or   trend reversal. In the case of a symmetrical triangle it is normally taken as a neutral pattern. This pattern when forms in a chart can last for months. 

 
CHART INDICATING A SYMMETRICAL TRIANGLE FORMATION

How to identify a symmetrical triangle in a chart?
 When we draw a support line and the resistance line, it will meet at some point and a triangle could be observed. This pattern actually indicates the buyers and sellers are not sure of the market direction. This uncertainty compels the share traders to get into the market and get out of too quickly. What matters mostly is the price that gets narrowed and the support and resistance trend lines converge and meet, completing a triangle. This forms the symmetrical triangle in a chart. . We should take note of the volume levels that are coming down. This low volume actually is evidence that a symmetrical triangle is in formation. This also denotes the trading activity is slow, and traders will not come in unless a large price movement is seen.

Trading with symmetrical triangle pattern 

Triangle formations in general are normally a very reliable patterns. A symmetrical triangle pattern is not an exceptional. Symmetrical triangle pattern tells us that the market is about to reverse or a continuation of the original trend. Taking into consideration the dependability of the symmetrical triangle formation, we can expect a breakout on the upper side. When the breakout occurs it must be supported by high volumes. Otherwise traders should be cautious and delay their decision until a confirming signal is generated. Breakouts normally begin between three-quarters and two-thirds of the horizontal width of the formation. It can happen before the trend line meet together. When traders see opportunity they enter the trade in which in turn propels the price and volumes. Hence the price rises.
When we enter a trade we must have a target in mind. The way targets are calculated for symmetrical triangle is the height of the triangle formation is measured and the value is obtained. This value is added to the point where the breakout has begun. Now we have the anticipated technical target level. 

Unlike the ascending and descending triangles symmetrical triangle tends to be a neutral pattern. This means a symmetrical triangle must viewed a consolidation pattern. This also means that an investor can expect the previous trend to continue (in majority of the occurrence) at the same time can expect a breakout or breakdown.
The investors who observe the formation of a symmetrical triangle will have to ensure the following points.  

Highs and lows (minimum two of them) touching the trend lines.
The decrease of the volume towards the end of the triangle (on the right side).
The increase of the volume at the beginning of the breakout.

As many analysts believe, a symmetrical triangle breakout patterns are driven by market news and change in fundamental stand of a stock. To a greater extend this seems to be true.

If correctly identified symmetrical triangle patterns can come to the aid of a trader in making investment decisions.


No comments:

Post a Comment