The market analysis does not necessarily require technical indicators to predict the trend’s direction and determine an exact moment when prices will accelerate. The main reason is that most of the technical indicators have a lagging nature due to the mathematical formulas which take into the account past price action but do not see the markets’ intentions. In this case, the graphical analysis will help traders to find the best entry points, as well as place right stop-loss orders and maximise profits. Many graphical patterns exist on price charts and traders usually follow the sequence of action in order to find standard patterns or set-ups. We’ll talk about triangles today.
A triangle appears when support and resistance lines of a price action create some sort of shape similar to a triangle. Most of the triangles are rectangular meaning that whether resistance or support lines are horizontal. However, some of the triangles might be asymmetric with ascending or descending formations. Most of the asymmetric triangles point to bullish (ascending) or bearish (descending) continuation, while rectangular triangle patterns usually appear in a sideways consolidations rage, and show potential breakouts or accelerations. That’s exactly what we’re searching for in order to increase our profits from trading and catch a strong wave, holding positions for quite a while when the market is moving in one direction with comparatively high speed. This is why we’ll talk about rectangular triangles today.
When it comes to timeframes to find triangles, the best chart depends on an individual trading strategy. If a trader is interested in preferably a small number of entries and he’s ready to hold his positions for 4-5 trading days on average, then he should monitor the daily timeframe for the graphical analysis patterns. But if we mean the intraday trading approach with frequent entries and exits, then the 1-hour chart would suit the technique. The only thing which is typical for both options is that triangles may appear on any chart.
One condition is essential for any rectangular triangle. The more touch points support and resistance have, the more reliable is that chart set-up, and thus the likelihood of catching a strong trend is higher. Nonetheless, resistance and support lines must have at least 4-5 points before concluding that the pattern could workout as a triangle. An example of an ascending rectangular triangle is shown on the hourly USD/JPY chart below.
The explanation of the price action is simple. We have a consolidation period inside the triangle. The bulls showed their power in the left-side surge, but the momentum was exhausted on the approach to the horizontal resistance line. As a result, the bears took the market under control and pushed USD/JPY quotes to the ascending support line during the retracement. After that, buyers and sellers were fighting for the trend’s direction, however, all of the attempts to exit the graphical formation failed. Thus, both of the lines held prices from moving outside, and the formation got the form of the rectangular triangle as the number of touchpoints exceeded 7. Such a process traditionally happens when an asset is gathering power or momentum to proceed with the trend or accelerate the action. The sideways consolidation range has been narrowed several times, causing so-called spring reaction. Finally, the bulls pushed the pair above the horizontal resistance line, and the uptrend accelerated.
What usually happens after the spring breakout is that the price moves at least for a distance equal to the vertical base of the triangle. Therefore, take-profits orders can be easily calculated after the triangle pattern was confirmed. Once a quote reaches the target, the triangle formation is considered as already worked out. However, in our case, we have a unique example of further continuation as USD/JPY did not work out the full distance of the horizontal base, and pulled back to the breached resistance line, which worked as the support. That retracement gave us another chance for lucrative entry, as the bearish retracement did not breach the horizontal line with close price, and only shadows left below it. As a result, a bullish acceleration of the uptrend occurred, giving profits fo more than 100 pips in 24 hours. Thus traders should not rush exiting the market even after the triangle breakout, but analyse further price action and sometimes add more volume into the trading positions.