A symmetrical triangle is a price pattern that forms when support and resistance levels
converge.
This continuation pattern, or pattern that occurs mid-trend, is likely to continue following
the trend after a breakout.
In this video, we'll discuss how symmetrical triangles form, how to use them to identify
potential buy and sell signals, and what actions you may consider if a breakout occurs.
First let's discuss why this pattern exists.
Symmetrical triangles occur when a stock is consolidating, or trending sideways.
Consolidation is regarded as a period of investor indecision that ends when a trend stops moving
sideways and either continues or reverses direction.
Basically, consolidation occurs when buyers and sellers are equally unsure if a trend
is going to continue.
During this period of indecision, support and resistance levels inch toward each other.
This creates a symmetrical triangle.
Now that you understand how a symmetrical triangle forms, let's learn how to identify
the pattern.
First, the stock price needs to touch the rising support level at least twice and the
diminishing resistance level at least twice as well.
If this pattern continues, support and resistance levels will eventually cross.
When they do, this cross-point is called the apex.
While stocks rarely reach the apex, it's an important element to consider when setting
price targets, which we'll explain later.
The next way to confirm a symmetrical triangle is by examining its time frame.
Triangles usually take between three weeks and three months to form.
If this pattern forms in less than three weeks, it's generally considered a pennant.
Now that you know how to identify a symmetrical triangle, let's discuss how they can be
used to identify potential buy and sell signals.
While some traders are confident trading within support and resistance levels, other traders
wait until a breakout is identified to buy the stock.
One way to identify a breakout is volume.
While the triangle is forming, volume will slowly diminish.
Without increased volume, it could be a false breakout.
However, in addition to volume changes, there are other ways to identify a breakout
such as waiting for a certain amount of time.
If the stock has risen for three straight days after the breakout, this could be considered
a confirmation.
Now that you know potential basic buy signals and how to identify a breakout, let's discuss
how to determine potential sell signals.
Like buy signals in triangles, sell signals can be different for different kinds of traders.
For example, a short-term trader may open a short position at resistance, whereas a
long-term trader may decide to hold onto the stock until the price has fallen below support.
Now that you've identified possible buy and sell signals, it's important to set
a price target for the stock.
Traders may use two methods to estimate the minimum price projection, or price target.
The first method is to measure the height of the triangle's base and add it to the
value at the triangle's apex.
Second, use a parallel trendline to set the target.
This is done by tracing a line parallel to the support level, starting at the first contact
point of the triangle at resistance.
This parallel line marks the potential price target.
Keep in mind that in many cases, the breakout may continue in the same direction as the
trend preceding the triangle.
This means that a previously uptrending stock may continue moving upward and a downtrending
stock may continue moving downward.
Though this is a typical market reaction, it isn't a rule.
That's why many traders think it's important to wait until the breakout is identified before
making any investing decisions.
When you set a price target, many traders use a stop loss to help protect against setbacks.
Setting a stop loss can help reduce your losses if the stock breaks in an unexpected direction
or if the breakout proves to be false.
While there is no guarantee of success, being able to use price patterns to identify potential
buy and sell signals can help improve your trading strategies.