Triangles
Continuation Patterns are patterns that show up in the middle of a trend at prices where the market settles down before moving in the same direction as the trend. There are a few main patterns of consolidation, and they all follow the same simple rules.
- The price will move in a clear direction before hitting support or resistance.
- The price will stay about the same for a while, making the continuation pattern.
- The price will break through the support/resistance level, which will show that the trend from before will continue.
There are a few different ways to keep going, and the articles would start with Triangles.
Triangles
Triangles are best described as two lines going in the same direction. From this alone, traders can quickly come to two conclusions about triangles:
- As they get closer together, their volatility goes down, which means a break out is coming.
- Once one of the triangle's trend lines is broken, traders can expect the market to move in that direction.
There are three main kinds of triangles: ascending, descending, and symmetrical triangles.
Triangles That Get Smaller
The descending triangle is a consolidation zone in the shape of a triangle with a hypotenuse that slopes down at the top. A straight trend line goes through the hypotenuse. When the market breaks through this trend line, it is usually seen as a sign that sellers have the momentum in the market and that shorting may be a good idea as a result. So, it seems reasonable to say that the descending triangle usually shows up in a market that is going down and indicates that the market will continue to go down.
http://www.actionforex.com/images/stories/articles/tut patterns 8 1.gif
Ascending Triangles
As you might expect, the ascending triangle usually shows up in a trend that is going up, and it means that the trend will keep going up. The ascending triangle is basically an inverted descending triangle. It has a hypotenuse that moves up over time, and above it is a straight trend line that traders are watching closely as a key resistance point. When this confirmation comes in, it can be a sign that buyers have taken control of the market, making it a good time to buy.
In the chart below, the USD/CHF pair formed an ascending triangle over the course of 5 days before an important piece of economic data was released. Three times, the price hit the resistance level of 1.2545 before it broke through. The converging ascending triangle was made when the buying pressure pushed the support level higher on the hypotenuse side. As soon as the economic data came out, the price broke through the resistance and went up even higher.
http://www.actionforex.com/images/stories/articles/tut patterns 8 2.gif
No matter whether the triangles are going up or down, they show how traders think about the market. Before the breakout, traders don't know which way the price will go, so they trade very carefully. This is shown by the narrow trading range before the breakout. Before the final breakout, traders are becoming more careful, so the range will get smaller. Once the direction of the breakout is clear, people who want to trade in that direction will enter the market. This gives the market a strong momentum after the breakout.
In the end, though, the shape of the triangle is not the most important thing it says. The direction of the breakout from the triangle gives the signal, which can be a continuation of the trend or a change in the trend.
Triangles with equal sides
The symmetrical triangle has two sides that are the same length and that slope in the same direction. It doesn't favour either a break down or a break up. So, traders should look for it to show that the move in the original direction will continue, or that the overall trend is moving in the same direction.
In the chart below, USD/CHF formed a large symmetrical triangle over a six-month period before breaking above resistance and going up. It was hard to tell which way the price would go when it broke out. Traders can pay attention to the original trend and trade in the same direction as the overall trend.
http://www.actionforex.com/images/stories/articles/tut patterns 9 1.gif
A symmetrical triangle's trade signal shouldn't be a surprise, since it's made up of a rising support line and a falling resistance line that meet as the chart moves to the right. At some point, one of these technical levels will have to be broken. When that happens, the trader can use the line just like a simple trend line. When a triangle gets smaller, the breakout can be decisive because buying or selling interest has grown while the price has stayed the same.
