HOW TO TRADE TRIANGLES – A

STEP BY STEP GUIDE

Triangles are a very popular price action concept but there are a lot of
misconceptions about what they really show and how to interpret triangles
correctly. Triangles can tell you a lot about market dynamics, momentum
shifts and the balance between bulls and bears – if you know what you are
looking for.

What is a triangle telling you?

A triangle tells you a lot about the market and the current situation. The
easiest way to understand triangles is by looking at an example outside the
world of trading. When you throw a ball it will bounce, but each bounce will be
lower than the previous one. The ball is losing momentum and gravity takes
over until the energy of the ball is completely gone and it does not bounce
anymore.

Triangles in the world of trading

In trading, it works almost the same. There are different kinds of triangles, but
we will focus on the most important one – the asymmetrical triangle. The
screenshot below shows that each bounce has a lower high. At the same
time, the higher lows are not moving up with the same strength; clearly, the
highs are coming down faster. Price is losing the bullish momentum and
each time price tries to move higher, it is being pushed down earlier.

Triangles are a manifestation between the “fight” (imbalance) between

long and short positions. Knowing how to interpret such a scenario can
help your decision-making process and deepen your understanding
about market dynamics.

Of course, there are also asymmetrical triangles that signal bullish strength as
the screenshot below shows. It is obvious that price is moving into the
resistance area with strong force. Each time price moves down, the bulls take
over sooner and drive price back into the resistance area. This is not to be
confused with a double top pattern which can look very similar.
 

Triangles and losing momentum – 3 case

studies on how to trade triangles
The screenshot below illustrates how a triangles shows losing momentum.
Each time it touches the support level, the following bounce back up becomes
smaller as the MACD indicator shows.  Just before broke price broke the
support level, it tested the upper trendline multiple times but failed to break it.
Combining all those points gave some early indications that a break to the
downside was more likely than a break to the upside.

 
 

The next screenshot below shows another example of how the momentum to
the upside is building up each time price moved into the resistance level. Back
then, everyone was watching the 10,000 price level at the DAX and you could
read about people expecting a reversal to the downside every day. The final
triangle clearly supported a breakout to the upside. Price had been moving
into the resistance area multiple times and each time the bounce to the
downside become shallower. At the same time, the RSI indicator confirmed
the losing momentum to the downside.

Yes, shorting into the 10,000 would have provided some good trading
opportunities as well, but the real money was mad after the break of the
triangle.

 
 

Reminder: profitable trading is about connecting the dots and

combining the clues your chart patterns provide to build sophisticated
trade scenarios. Profitable trading is not only hunting for signals but
understanding market dynamics.

The final example shows another multi-bottom and a trendline that is moving
down. Especially interesting are all the candle wicks that are sticking out to
the top. Multiple failed attempts to break to the upside fooled amateur traders
and also showed the lack of bullish support. Although everything pointed to a
break to the bottom, the final signal did not come until price broke the support
level with the large red candle.

 
 

How not to trade triangles

Triangles are a great trading concept, but they will fail – often. However, the
biggest mistake traders make is that they enter BEFORE the break of the
triangle happened. Take a look at the screenshot below – based on the
previous triangles and momentum analysis, one would have expected a break
to the downside; the highs were coming faster and price moved into the
bottom trendline rapidly. But it did not happen and price broke out of the
triangle to the upside.

This highlights that triangles are not the Holy Grail and they will fail. And
secondly, the real signal of a triangle happens when the trendline has been
broken – not before. Furthermore, a break of the trendline is only valid after
price closed outside the triangle AND stayed outside it. Waiting for a full
candle to form outside the triangle will make you miss some runaway trades,
but it will keep you from taking some failed breakouts as well.

 
Wrapping things up – how to trade triangles
Here are the most important points and tips when it comes to understanding
and trading triangles:

 Analyze the slope and the angle of trendlines

 The angle and the formation of highs and lows are a manifestation
of the (im)balance between bulls and bears
 A triangle typically shows losing momentum to one side
 Double tops and/or failed breakouts before the triangle forms are great
tells
 RSI or the MACD can help measure the momentum in triangle patterns
 Triangles will fail very often. They key is to wait for a confirmed
breakout