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Chart Formation – Continuation Patterns (Part II)
Education | 31 August 2012
By:

By Chart Nexus

Our final price pattern in this second installment, the symmetrical triangle, addresses the scenario when at least two lower highs and two higher lows are formed. This price pattern has an even bias to a breakout on either the upside or the downside.

Prices will form lower highs as well as higher lows during its convergence towards the apex of the triangle. This shows that buyers and sellers are evenly balanced and the price consequentially trades in a converging manner until a breakout towards either side happens.

Figure 1: Symmetrical triangle example – Neptune Orient Lines

As shown in Figure 1, the price chart of Neptune Orient Lines depicts converging lower highs and higher lows. While the ascending and descending triangle patterns dictate the market tone, where it is bullish and bearish respectively, the symmetrical triangle indicates a balance between buyers and sellers. Hence, it is only after a breakout to either side can we conclude whether it is trending higher or lower. From mid February 2012 to early April 2012, we can see that every price rally was lower than the previous attempt and every price retracement ended up higher than the previous one. A breakout to the downside then occurred in mid-April 2012.

There are other essential factors to consider when we are trading on triangle patterns. The best triangle should last from a minimum of one month to a maximum of three months, with the breakout located not too close to the apex. The volume should be drying up as the price trades towards the apex of the triangle. Upon a breakout of the triangle pattern, volume should be significantly higher. It will be even more bullish or bearish if the price gaps up or down in the breakout.

In this two-part article, we have discussed the three types of price patterns known as triangles. Triangles, alongside subsequent breakouts, provide us with an insight of future trends and market behaviour. Breakouts can be further validated with an expansion in volume, accelerated price movements and gaps for confirmation.


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