Drawing a symmetrical triangle on the chart and place a trade accordingly
Triangles are usually continuation patterns, so we should already have an established trend before trading them. Triangles come in three types: symmetrical, ascending, and descending triangles. We will examine each pattern separately, starting with the symmetrical triangle.
The Symmetrical Triangle
symmetrical triangle marks a consolidation period after the market has been
trending for a while. Since this formation is a trend continuation pattern, the
first condition that needs to be satisfied is a prior established trend. The
symmetrical triangle is a bullish pattern if the previous trend has been up.
Expect the bulls to break the top side of the triangle and push prices higher.
Conversely, the symmetrical triangle is a bearish pattern if the prior trend
has been to the downside. In this case, a break to the downside is more likely.
The pennant, another chart pattern we will be covering, looks very similar to the symmetrical triangle. The main difference between the two is that in the case of the pennant, the prior trend is very fast and near vertical, resembling a flagpole. We will look at this formation in another tutorial. On the other hand, the trend before the symmetrical triangle is slower and more established; it does not have to look like a vertical line.
Aside from an established trend, more conditions need to be met before classifying a pattern as a symmetrical triangle. Let us demonstrate these with an example. The chart below shows a symmetrical triangle in the US30 (Dow Jones Index).
We can see that the US30 is already in an uptrend, satisfying criterion number one, which means that the symmetrical triangle on our chart is a bullish pattern. Next, we need at least 2 points on the high end (trend of lower highs) and 2 points on the low end (trend of higher lows). We then use these two points to draw one trend line connecting the highs and one line connecting the lows. Ideally, you would want to see three or more points on each side, as in our example below.
Each successive high should be lower than the previous high, and each low should be higher than the previous low. The connecting highs should produce a trend-line that slops down. Conversely, the connecting lows should give us an upward sloping trend line. We now have our symmetrical triangle.
Stop Loss, and Target
The entry for the symmetrical triangle pattern is at the break of the triangle. To have better odds, you should trade breakouts that occur in the direction of the previous trend. In our US30 chart above, the prior trend was up, which means that we will only look for long (buy) trades.
The breakout occurs to the upside as prices close above the higher bound of the triangle at 25931. The conservative approach for risk management is to place the stop loss on the other side of the triangle. This would put our exit at 25460, for a total risk of 466 pips.
aggressive approach would place the stop below the most recent important swing
high; in our example, that would be at 25800. This puts our total risk at 131
pips. We will leave out the spread to simplify our calculation. If you want to
recalculate the trading costs included, you can use the typical spread for the
US30 of around 2.5 pips.
We take the total distance of the symmetrical triangle and apply it to the breakout point to calculate our target. In our US30 example, the total distance is 809 pips. Adding this to the breakout point puts our take profit at 26744. As we can see in the picture above, the currency pair hit our target in July of 2020.