Trading symmetric triangle patterns

March 28, 2017 01:00 PM

The Symmetric Triangle pattern is one of the most important chart patterns in technical analysis. This chart patterns forms when the market is in an indecision mode where supply/demand is in a state of equilibrium. Even though it is hard to predict the direction of the price breakout from this consolidating pattern, it is generally considered to be a continuous pattern and breaks out in the established trend prior to the pattern formation. Once the price breaks out of the pattern, it usually results in a large move in the direction of the breakout. Symmetric triangles are also called “coils” or “contracting wedge” patterns.

Symmetric triangles can be easily detected when price makes alternate lower highs and higher lows in upside and downside slopes thereby defining a clear symmetry. Symmetric triangle patterns consist of two converging upward sloping (lower) and downward sloping (upper) trendlines connecting the lower-high pivots and higher-low pivots bounding the pattern.  

The trend before the pattern usually signals the breakout direction from the pattern signifying a continuation pattern. The pattern consists of at least two price pivotal points on each of the upper and lower trendlines. Once price breaks out from either of the trendlines, the pattern is considered complete (see “Gearing for a breakout,” below). Volume decreases within the pattern and increases at the point of breakout. Prices usually break out one side or the other before reaching the “apex’” of the triangle and may take weeks to months for it to form into a valid breakout. 

The optimal breakout point occurs between 50% to 75% of the pattern width. Symmetric triangles often produce “throwbacks” where price retraces back to the trendline. Some traders look for these throwbacks for potential entry points.

Trading symmetric triangles

Trades should be taken when price beaks above the upper or below the lower trendline in a symmetric triangle after forming at least two pivots on each of the trendlines. The optimal breakout point should be about 50% to 75% of the width of the distance between the first two pivots. When a breakout is confirmed by price closing above the breakout bar’s high (in the case of upside), enter a long trade. When a breakdown is confirmed by price closing below the breakdown bar’s low, enter a short trade. Some traders use a 2% higher price level above breakout or 2% lower price level below breakdown to qualify, a “true” breakout.

Stop: Symmetric triangle failures occur when the market results in false breakouts. Place a stop below the last pivot level (4) of the trendline for a long setup and place a stop order above the high of the trendline for a short setup. In large symmetric triangle patterns, an aggressive stop level could be placed at the “apex” level. 

Target: Symmetric triangle targets are computed by adding the height of the entire triangle from breakout level in an upside triangle breakout. Protect targets by using trail stops.

Baidu: Long or short 

Baidu (BIDU) has formed a symmetric triangle in 2016 between $139 and $216 and has yet to choose whether it will break out or break down. BIDU made lower highs and higher lows in a coil format. It formed three upper pivots and two lower pivots to complete the pattern. Currently, BIDU is trading at $174. It is also trading above its 200-day moving average and may break out from the pattern’s upper or lower trendlines. The case for both upside or downside break out trades is presented here (see “Gearing for a breakout”). 

Trading bidu breakout/breakdown 

  1. Currently, BIDU is trading in a symmetric triangle with a weekly close at $174. 
  2. The pattern formed three higher-low pivots on the upper trendline and two lower pivots on the lower trendline.
  3. If price breaks above the upper trendline with increased volume, it may signal a breakout; if price breaks below the lower trendline with increased volume, it may signal a breakdown.
  4. Enter a long on upper trendline breakout above $189.50; enter a short on lower trendline breakdown at $162.
  5. If long, place a stop at the Apex $176; if short place a stop at the Apex $175.
  6. The height of the symmetric triangle pattern is $80.
  7. Long targets: Targets are placed at 62% ($237) and 100% ($266) of its height above the breakout levels.
  8. Short targets: Targets are placed at 62% ($115) and 100% ($83) of its height below the breakdown levels.

Trading bidu breakdown 

  1. Currently, BIDU is trading in symmetric triangle with a weekly close at $174. 
  2. The pattern formed 3 higher-low pivots on the upper trendline and 2 lower pivots on the lower trendline.
  3. If price breaks below the lower trendline with increased volume, it may signal a breakdown.
  4. Enter a short trade on lower trendline breakdown at $162.
  5. Place a stop at the apex $175.
  6. The height of the Symmetric Triangle pattern is $80.
  7. Targets are placed at 62% ($115) and 100% ($83) of its height below the breakdown levels.
About the Author

Suri Duddella