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How to Use Triangles in Foreign Exchange Trading
Education | 14 March 2013
By: Stuart McPhee
Articles (22) Profile

In the realm of technical analysis, there are numerous chart patterns that foreign exchange (forex) traders use to analyze and identify trading opportunities. One of the more popular patterns is triangles. These patterns, characterized by a contraction in price range and converging trend lines which cause a triangular shape, reveal continuations that should be studied closely.

A triangle forms in a chart when the distance between the highs and lows over a period of time is decreasing. There are three basic types of triangles:

• symmetrical
• ascending
• descending

Traders typically apply triangles to wait for the price to ‘break out’ from the pattern being formed. The most commonly used are ascending and descending.

Symmetrical triangles
A symmetrical triangle occurs when both the highs and lows are moving toward each other — essentially, when a price is achieving lower highs and higher lows. It can occur in either an uptrend or a downtrend as a ‘continuation pattern’.

A continuation pattern occurs when the price continues to move in the same direction as it did before the pattern formed. Occasionally, a symmetrical triangle can show a ‘reversal’ pattern (the opposite of a continuation pattern), but in either case the pattern is confirmed once the price breaks out from the triangle.

Ascending triangles
Ascending triangles are often bullish chart patterns and they occur when a price is achieving higher lows, but resistance is keeping the highs at around the same level. Below is an example shown in a four-hour chart of the Australian dollar (AUD/USD).

Notice how the solid line across the top of the chart is at the price of US$1.04 and how the price has often come close to touching it. During this same time, however, note how the lows in the chart (or troughs) are increasing in value. This indicates that the demand for the currency is increasing as buyers place greater pressure on sellers, which raises the level of support. The price generally breaks out to higher levels when an ascending triangle is formed. In the top right-hand corner, we can see that the price has finally broken higher from the level of resistance.

Descending triangles
Descending triangles are considered bearish signals and they show the opposite price movements as they occur when a price is achieving lower highs. However, the lows will stay mainly at the same level due to support. In the chart below, you can see how the Singapore dollar (USD/SGD) has broken down from a descending triangle, where the support was constant at $1.28.

In this pattern, the fact that the highs are decreasing indicates that the supply is increasing, as sellers are being aggressive and placing greater pressure on buyers. Price generally breaks down to lower prices when a descending triangle is formed.

Practice using triangle patterns with a free OANDA demo trading account. A good way to learn is to experiment with identifying these and other useful chart patterns in a real-market trading environment, but with virtual currency instead of actual money.

Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

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