To understand continuation of triangle & reversal patterns it is mandatory to identify the basic triangle patterns. There has been a difference of opinion over years about triangle pattern formation, some technical analyst classify triangles as reversal patters while others in continuation pattern category. Truth is they can be classified both as reversal and continuation pattern. Triangles act as continuation 75% of times and 25% reversal. Identifying this is the key to making money.
Triangles occurs when the price range between tops & bottoms narrows in technical language price is facing support or resistance level which restricts major movement.
Generally seen triangles named by their appearance are listed as:
• Ascending triangle –Bullish
• Descending triangle -Bearish
• Symmetrical triangle –Neutral
ASCENDING TRIANGLE
This triangle is bullish in formation as mentioned earlier specially formed during an uptrend and also as continuation pattern. They are formed when the price move shows signs of fatigue and turns sluggish. Continuation pattern indicates that this pause is only prevailing trend not reversal. There have been instances when ascending triangle forms as reversal pattern again 75:25 ratio mostly seen at the end of downtrend which are typically continuation patterns. Buyers are more active than sellers. Regardless of where they form these triangles are bullish and indicate accumulation because of its shape, its also known as right-angle triangle. To form this triangle we need two or more equal highs from the top to form a horizontal line and two or more lows rising bottoms to form an ascending trend line that meets the horizontal line at it rises.
Characteristics of a Ascending Triangles :
TREND:
There should exist a well established prior trend to qualify as continuation pattern, failing to this makes it difficult to have trading opinions. Robustness (strength) of formation matters the most than length and duration of the ongoing trend.
TOP HORIZONTAL LINE:
For an ascending triangle to qualify as a continuation pattern the top horizontal line should be formed by existence of two highs not exact high but within the proximity of each other having reaction lows. There must be a gap frame of a one week to three or four weeks.
LOWER ASCENDING TREND LINE:
Minimum of two reaction lows are required to form the lower ascending trend line. The reaction lows should be successively higher with some time gap between both low’s. There is always a suspect if more recent reaction low is either equal or lesser than the previous reaction low, the upward slope of this trend line will not be formed hence it would not validate as an ascending triangle.
Duration:
The length of the pattern can range from a few weeks to many months with the average pattern lasting from 1-3 months.
VOLUME:
As the pattern develops volume shrinks. When the breakout occurs there should be a huge expansion in volumes to confirm the breakout. Though volume confirmation is preferred, it is not always necessary. High volumes during breakout in either direction help in deciding which side a majority of the players is backing.
RETURN TO BREAKOUT:
When the horizontal resistance line of the ascending triangle is broken, it turns into support .A basic tenet of technical analysis is that resistance turns into support and vise versa. Sometimes there will be a return to this support level before the move beings in real earnest.
TARGET:
By measuring the widest distance of the pattern and applying it to the resistance breakout we can calculate the target for the price after a breakout has occurred.
In contrast to the symmetrical triangle, an ascending triangle has bullish bias before actual breakout. As we all know symmetrical triangle are neutral formation that relies on the impending breakout to dictate the direction of the next move. Key things to understand in ascending triangle is the horizontal line clearly shows overhead supply that prevents security from moving past a certain level. It looks like large sell orders has been placed at this level and its taking a number or weeks or months to execute, thus preventing the price from rising further. Even though the price cannot rise crossing this level, new lows are made and continue to rise. It is these higher lows that indicate clear buying pressure and give the ascending triangle its bullish bias.
DESCENDING TRIANGLES
Bearish in nature forms during a downtrend typical mirror image of ascending triangle, and is continuation pattern indicates the distribution. In some cases descending triangles act as reversal patterns at the end of an up trend but descending triangles are mostly known for its continuation. The bottom horizontal line (support line) formed by two or more equal low price where as the descending trend line(resistance line) is formed by two or more declining peaks. Extending both lines meet at a junction called apex these patterns easy to identify and reliable to trade with a very favorable risk reward ratio.
Trend:
To qualify as continuation pattern it must be an established trend and focus must be on the robustness than duration.
Lower Horizontal Line:
This line must have at least 2 equal or similar lows with a time period separating the lows and highs between them.
Upper Descending Trend Line:
This line is crucial to justify this pattern formation. Two reaction highs are needed to form upper descending trend line, the second high must me lower than the first one with some distance between the highs, failing to which this formation will not be valid. The price usually rises to hit the upper descending line at least twice before going down. Prices should fall to the lower horizontal line twice and then move up. The lower horizontal line is not a perfect horizontal line but must be more or less like one.
Duration:
This pattern usually takes 4 weeks to 10 weeks to form and can last anywhere between 1 to 4 months.
Volume:
Volume plays a vital role to confirm true triangle but one must not totally rely on volume breakouts. As the pattern develops volume contracts, during the breakout noticeable volume expansion happens in most cases.
Return to Breakout:
The horizontal line (support) and descending line (resistance) as the price breaks the support then acts as resistance. Sometimes prices return to this new found resistance level before the prices fall down further.
Target:
After the breakout price projection is found by measuring the widest distance of the pattern and subtracted it from the resistance breakdown.
It is important to be able to identify the change of pattern in a short spam of time as it can give good returns. Please note that these patterns vary in weekly and daily charts on occasions we see such patterns formed in intra day.
SYMMETRICAL TRIANGLE
This is often referred as a coil, usually forms during an ongoing trend as a continuation pattern. This pattern contains two lower highs and two higher lows, on connecting these points in lines and the converging point a symmetrical triangle comes into shape. One can often think that it appears like a contracting wedge as it looks wide at the beginning and narrows over time. This triangle regardless of its nature of the pattern, continuation/reversal a major move can only be detected after a valid breakout. As well it’s also known as period of consolidation before the price moves beyond one of the identified trend lines. A break below the lower trend line signals a move lower, while a break above the upper trend line signals the beginning of a upward move.
Trend:
To qualify as a continuation it must have an existing established trend and the trend should be at least few months old.
Four Points:
At least 2 points are needed to form a trend line and we need 2 trend lines making 4
points to form this triangle. Now comes the tricky part the upper trend line should be sloping down the second point should be lower that the first one and in the lower trend line the second low must be higher than the first point to make an upward slope. Total of 6 points will be formed in this pattern before a breakout occurs.
Volume:
During the triangle extends volume diminishes hence here before the breakout occurs at the time of consolidation.
Duration:
This should idealy take anywhere between 4 weeks to 3 months. If this pattern occurs
within in 3 weeks it’s considered as a pennant.
Breakout Time Frame:
The ideal breakout point happens half to 3/4th of the pattern development. Time frame can be measure from the Apex as the apex nears the breakout must occur. Any breakout
before the half way of the pattern formation is premature and break to close to apex is insignificant.
Breakout Direction:
This can be determined only after the breakout has occurred but attempting to guess the direction can be dangerous leading to blind trading. Even though its continuation and is suppose to breakout in same direction but long term trend is not the same case.
Breakout Confirmation:
To validate the breakout on closing basis some traders apply 3% break sustained up to 3trading days and adding to this confirmation is volume expansion especially for upside
breakouts.
Return to APEX:
After an up/down breakout the prices usually can return to the apex and this apex takes support/resistance for before resuming the direction of the up/down breakout.
Price Target:
Two ways to estimate the targeted price after breakout. First one is widest distance of
the triangle can be measured and applied to the breakout point. Second, a trend line can be drawn parallel to the lower trend line which is slopping up in the direction of the break. The extension of this line will mark a potential target for breakout. Edwards & Magee suggest 75:25 continuation to reversal chances .Reversal patterns are usually difficult to analyze and often have false breakouts. We should not anticipate the directions rather wait for the breakout to occur and detailed analysis should be applied by looking at gaps accelerated price movements, volume for upside breakout confirmations. Price sometimes returns to the breakout point of apex giving a second chance to enter with better reward to risk ratio. All the targets measured act merely as guidelines technical analysis is required for ongoing price assessment.
WEDGE PATTERNS
Wedge a relatively smaller group of soldiers use to “crack open” enemy lines and drive into enemy ranks. Even the US Army uses this formation in battle till date. Trading the financial market is akin to fighting war and the patterns are our ammunition for winning and making money. The wedge is a technical chart pattern composed of two converging lines connecting a series of peaks (high) ad troughs (low) the presence of converging trend line makes wedge pattern look very similar to symmetrical triangle in appearance. Wedges can be distinguished by a noticeable slant either upside or downside. In comparison to flags and pennants, wedge formation takes longer and volume diminishes during the formation and increases during the breakout. There has been a difference in opinion that wedges are reversal patterns than continuation mere fact being its appearance as to keep it simple we will see how they are used to trading benefits. Detailed explanation for both will be drawn to attention.
RISING WEDGE REVERSAL
Rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows as we move further. In contrast to symmetrical triangle, which has no definitive slop and no bullish or bearish bias, rising wedges definitely has an upward slope and have bearish nature.Rising wedge continuation is usually found during a down trend, though sometimes found in an uptrend is still regarded as bearish. This pattern slopes upward against the prevailing down trend. Rising wedge shows a series of higher tops and higher bottoms. This pattern begins with being wide at the start and contracts as prices move higher and trading range narrows. Concluding both reversal/continuation rising wedges are bearish in nature. Rising wedge indicates interruptions in a falling price trend.
FALLING WEDGE REVERSAL
Falling wedge is bullish pattern that begins wide at the top and contracts as the price moves lower. This price action forms a cone that slopes down as the reactions highs and reaction lows converge at a point. In contrast to symmetrical triangles, which have no definitive slope or bias falling wedges definitely slopes down. The bullish bias cannot be confirmed until a breakout in resistance is seen. Falling wedge as a continuation pattern slopes down, but the slope is against the prevailing up trend. This pattern is usually found during an uptrend and is bullish begins by being wider at the starts and contracts as price moves lower. Falling wedges can be found during a down trend as well however they are generally considered bullish. Down trend patterns are marked by series of lower tops and higher bottoms. Concluding both reversal/continuation falling wedge pattern is bullish in nature. Falling wedge indicate temporary interruptions of upward price rallies. Falling wedges can be most difficult pattern to recognize and trade. Even though selling pressure decreases demand does not win out until resistance in broken. Use other technical analysis tools to confirm.
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