A symmetrical triangle is formed by a series of price reversals, each of which is smaller than its predecessor. For a legitimate symmetrical triangle formation, we need to observe four reversals of the minor trend: two at the top and two at the bottom. Each minor top is lower than the top formed by the preceding rally, and each minor bottom is higher than the preceding bottom. Consequently, we have a downward-sloping trend line connecting the minor tops and an upward sloping trend line connecting the minor bottoms. The two lines intersect at the apex of the triangle. Owing to its shape, this pattern is also referred to as a “coil.” Decreasing volume characterizes the formation of a triangle, as if to affirm that the market is not clear about its future course.
Normally, a triangle represents a continuation pattern. In exceptional circumstances, it could represent a reversal pattern. While a continuation breakout in the direction of the existing trend is most likely, a reversal against the trend is possible. Consequently, avoid outguessing the market by initiating a trade in the direction of the trend until price action confirms a continuation of the trend by penetrating through the boundary line encompassing the triangle. Ideally, such a penetration should occur on heavy volume.
A right-angle triangle is formed when one of the boundary lines connecting the two minor peaks or valleys is flat or almost horizontal, while the other line slants towards it. If the top of the triangle is horizontal and the bottom converges upward to form an apex with the horizontal top, we have an ascending right-angle triangle, suggesting bullishness in the market. If the bottom is horizontal and the top of the triangle slants down to meet it at the apex, the triangle is a descending right-angle triangle, suggesting bearishness in the market.
Right-angle triangles are similar to symmetrical triangles but are simpler to trade, in that they do not keep the trader guessing about their intentions as do symmetrical triangles. Prices can be expected to ascend descend out of a descending right-angle triangle.
