A good technical analyst is one with an arsenal of charting tools, but that in itself is quite useless. One needs to be able to identify patterns and using the appropriate tools. In this article, we explore triangles.
A triangle shows 2 converging trend lines, connecting at least 4 points, the price highs and lows. One line is sloping down, while the other is sloping up, because prices are making lower highs and higher lows. The longer this patterns takes to form, the stronger the breakout.
Prices can break out in either direction, up or down. In the chart above, we see prices making a bearish breakout. The price objective used is typically the height of the triangle “base”, indicated by the vertical arrows above. Stop loss levels can be placed at the other side of the triangle.
While triangles can prove effective, the challenge we face is that there is a certain level of redrawing of the triangle. Sometimes prices make new highs and lows, distorting your triangle such that you have to redraw your triangle. So what was initially a breakout by definition, was not a breakout.
It will be better to wait for a triangle which took a long time to form, that reduces the chances of having to redraw the triangle, as prices will be very close to the “apex” by then. This method of trading is also highly subjective and discretionary.