Charting University » Triangles
When price moves through one of these formations, we generally want to see an increase in volume. As the pattern itself develops, volume usually contracts. When an upside breakout occurs, there should be an expansion of volume to confirm the breakout. While volume confirmation is preferred, it is not always necessary. Often volume picks up further after the break is confirmed on the actual chart because traders flock to join the move.
Ascending Triangles are formed when a resistance line can be drawn across the highs, and an upward trendline (from left to right) across the lows. We are looking for two or more equal highs to form a horizontal line at the top, and two or more inclining bottoms to form an ascending trend line that converges on the horizontal line as it ascends.
This formation reverses when the lower trend line is breached and one or more Closes log below it.
The chart of KLAC below shows a breach in the opposite direction. The lines would still have allowed us to trade this, but in a downward direction.
Symmetrical Triangles are formed when a definite trendline can be drawn across the lows, and the highs of Price activity (from left to right). Symmetrical Triangles don't favor either side because of an even balance between buyers and sellers. A breach through either trendline signals the direction of the new trend. However, the move usually occurs in the direction of the previous trend, before the pattern formed.
Descending Triangles are formed when a support line can be drawn across the lows, and a downward trendline (from left to right) across the highs. We are looking for two or more equal lows to form a horizontal line at the bottom, and two or more declining peaks to form an descending trend line that converges on the horizontal line as it descends.
This formation reverses when the upper trend line is breached and one or more Closes log above it.
The reason to know both sides of the formation can be viewed in the DIA chart below. The base held after numerous tests but then finally broke. First resistance was then back at the base that originally failed. The actual Descending Triangle breakout came above the upper boundary line near $80.00. Once the upper line broke higher, shorts were squeezed and momentum buyers stepped in.
The chart of DIA below shows how well two timings can work together. This is a Daily chart and the one just above is of the same period of a Weekly chart. Both give a good view of the lower boundary breach, but the Daily is much finer tuned. If we would also to look into a 60-Minute chart I suspect it would give us even finer detail on the bearish breach.
The idea here is to get a view of where you should take higher percentage winning positions. These lines all paint a picture, but one that can always change. The advantage that we have is that we know where the lines are once they are noted and drawn on our charts. It is then up to us as to how much Risk vs. Reward we want to calculate into our own trading.