Generally speaking, a triangle pattern is formed on a chart when an analyst is able to draw two converging lines that form a wedge, or open-ended triangular, shape. These lines trace over the peaks and valleys of market fluctuations, ranging anywhere from a few weeks to several months in duration. Once the triangle pattern is fully formed, the trend line for the stock or commodity will “escape” the triangle, either in an upward or downward direction. The point which the trend line crosses one of the sides of the triangle is called the “breakout.” The direction in which the breakout is headed defines the overall trend for the commodity.
That's the overview. With that in mind, let's check out the three different types of triangle patterns, with illustrations and explanations for each.
The illustration above shows a Descending Triangle pattern. The lower line defining the triangle is horizontal, whereas the upper line is a downward left-to-right diagonal one. The peaks and valleys of fluctuation in a descending triangle pattern define a testing of the market that presages a downward trend; sure enough, when the breakout point occurs, the price of the currency will drop. As a result, a descending triangle pattern defines a “bear,” or downward-trending market. The fluctuations in the trend line indicate lower demand for the currency over a period of time, with a resultant fall in value. Some investors like to buy after a descending triangle pattern has formed, since the price is lower.
This illustration is a presentation of an Ascending Triangle pattern. It represents the investor market testing that precedes an upward-trending, or “bull,” market. It's the opposite of a descending triangle pattern, with the horizontal line forming the upper edge of the triangle, and an upward-sloping left-to-right diagonal line forming the bottom edge. The breakout point in an ascending triangle pattern goes through the top of the triangle, indicating an upward trend in investor demand and price; some savvy investors like to sell shares at this point, while the price is high and potentially more profitable.
The Symmetrical Triangle pattern—shown above—differs from the descending and ascending patterns in that both lines forming the triangle are angled, as opposed to one of them being horizontal. Like the other two types, this pattern precedes a sharp change in price; unlike them, the symmetrical triangle pattern is more difficult to predict. The breakout following one of these triangles can be in either an upward or downward direction; as a result, it could represent either a bull or bear market. It's wise to adapt a wait-and-see attitude when you see a symmetrical triangle pattern forming—at least until the direction of the breakout is clear.
The horizontal lines in both ascending and descending triangle patterns are called “support lines.” These represent a market value through which the currency is unable to rise above, or fall below, during the period of time represented by the triangle. When the breakout point crosses the support line, the triangle pattern is considered completely formed. In the case of a symmetrical triangle pattern, the support line is unknown until the breakout occurs.
As the illustrations above show, all triangle patterns represent steadily-decreasing fluctuations in market value. In the case of ascending and descending triangles, an investor with a sharp eye can see them forming and can make investing decisions ahead of time, depending on the trend the pattern indicates. Again, the only caveat is the symmetrical triangle pattern, which could go either way. Over time, you'll be able to identify triangle patterns on currency value charts, and take appropriate action according to your investment plans.
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