Price doesn’t always just move up and down in trends constantly. There are times when price seems to condense into a smaller and smaller range. When this happens, you may be witnessing the beginning of a triangle formation.
What is a Triangle Formation?
A triangle forms in a currency pair chart when there is a big battle between the bulls and the bears in a market. They are fighting it out to see which side will ultimately come out ahead, and both sides have dug their heels in trying to get the pair to move their way. Ultimately, a triangle formation is thought of as being a continuation signal in that the prevailing trend before the triangle forming is what is most likely to continue after the battle between buyers and sellers is over.
There should be a minimum of five touches of support and resistance that take place in a currency pair before it can be considered to be forming a triangle. This is necessary because that is the level of combat that must take place between bears and bulls before one can say that they are actually seeing a triangle formation. Those touches can be 3 touches of the support line and 2 touches of the resistance line (or vice-versa), as long as they add up to 5 or more.
A symmetrical triangle forms when there are highs and lows of the pair coming closer and closer together. When that happens, a triangle that is literally symmetrical in shape will begin to take shape, and that is exactly what traders want to see if they hope to trade these formations.
Something that is nice and neat like that is a great way for traders to know without question that they are witnessing a triangle forming, and they may pile in on the continuation of the trend that had been taking place prior to the triangle formation.
An ascending triangle forms when the price action on the pair is generally bullish, but there is a level that buyers cannot seem to get past. When that happens, the triangle will form in such a way that the price levels continue to climb in an upward way, but there is still some resistance when a certain point is hit. When that happens, it is still considered to be a continuation sign. In fact, in this case, it is a bullish sign overall because it means that the upward movements that have already been witnessed in the pair are likely to continue.
There are many reasons to look at an ascending triangle as somewhat of a good sign if you are a buyer. You may get frustrated that the price continues to hit a point of resistance in trading, but you can also note that it is likely that the price will surge higher once that resistance point is broken.
What goes up must come down, and that is why a descending triangle is the opposite side of an ascending triangle, and yet it is just as powerful on the other side of things. You can see this type of triangle as a bearish sign because it means that the downward trend that you had seen happening in this pair before is likely to continue. The descending triangle occurs when the price continues to hit against support levels that won’t seem to break. However, they eventually do break, and it can send the pair a lot lower when this happens. Thus, you may want to look out for descending triangles to find the spots in your trade where it makes sense to become a seller.
Price is Likely to Move One Way or the Other
It is not always a guarantee that an ascending triangle will lead to more bullish gains, nor will a descending triangle always mean that the bears win. What they can mean is that there is about to be a breakout in one direction or the other. If you play your cards right, you can capture that breakout and take advantage of it as it happens. A strong break to either side can be profitable for you as long as you place yourself in a position where you can take advantage of the trade. Make sure you look at triangles as a flashing red light that something is about to occur, and plant your trades in positions where you can take advantage of whatever is about to happen no matter what it is.
Disclaimer: All information provided here is intended solely for study purposes related to trading financial markets and does not serve in any way as a specific investment recommendation, business recommendation, investment opportunity, analysis, or similar general recommendation regarding the trading of investment instruments. The content, in its entirety or parts, is the sole opinion of SurgeTrader and is intended for educational purposes only. The historical results and/or track record does not imply that the same progress is replicable and does not guarantee profits or future profitable trading records or any promises whatsoever. Trading in financial markets is a high-risk activity and it is advised not to risk more than one can afford to lose.