Triangles are common patterns composed of two trend lines of different angles. At least two points on the top and two points on the bottom are required for form a triangle. There are three types: Symetrical Triangles, Right Triangles, and Expanding Triangles. In general, triangles are considered continuation patterns.
Figure 1 shows three different types of triangles in an uptrend. Point 1 shows an Expanding Triangle. Point 2 shows a Right Ascending Triangle. Point 3 shows a Right Descending Triangle that breaks up instead of down. Point 3 may also be viewed as a bull flag if the bottom dashed line was slanted down instead of horizontal. Point 3 shows a Symmetrical Triangle.
In a Symmetrical Triangle, the top trendline is slanted downward, and the bottom trendline is slanted upward. The range is decreasing as both bearish and bullish forces come closer to a balance. Many times this happens prior to a news event as trading activity declines.
A trade is generally taken when price breaks either trend line by 3 percent while still in the first three-quarters of the formation. In other words, the break should come before we get to the very end of the triangle apex. Otherwise, the break is less reliable. As usual, trades in the direction of the trend will have a higher chance for follow through. The minimum target is the height of the triangle.
Figure 2 shows a Symmetrical Triangle on the right and a Right Ascending Triangle on the left. Points 1 and 4 forms the top line. Points 2 and 3 forms the bottom line. At Point 5, price gaps through the top line, confirming the break.
In Figure 3, the dashed lines on the very left shows a Symmetrical Triangle in a downtrend. Price breaks at Point 1 in the direction of the trend. A second Symmetrical Triangle is present near Points 2 and 3. This triangle has a false break up, against the trend near the end of the apex. Because the break occurrs against the trend and near the end of the formation, it is less reliable. Point 3 shows a break down after a fake up. There is an inverse Head-and-Shoulder in the middle of the chart, reversing the trend from down to up. The dashed lines on the right shows a Symmetrical Triangle in an uptrend. Point 4 shows the break. Unlike the first one, this triangle retests the top trendline at Point 5.
Right Ascending Triangle
A Right Ascending Triangle is a bullish Right Triangle with a horizontal top line and an up-slanted bottom line. The top line represent a distribution of supply. Once this distribution has ended, price can advance. Trades are generally taken when price breaks above the horizontal line. Minimum targets are generally the height of the triangle.
In Figure 4, a Right Ascending Triangle is shown. Point 1 shows a temporary false break up. At Point 2, price breaks out and retest the break out area at Point 3. Point 4 marks the high of the bull run. It reached about the approximate the height of the triangle from the break.
Right Descending Triangle
Right Descending Triangles are bearish Right Triangles with a horizontal bottom line and a down-slanted top line. In a down trend, the bottom line shows short covering and possible buying. Once the demand has been fully satiated, a break of the bottom is usually a short entry with a minimum target equal to the height of the formation.
Point 1 in Figure 5 shows a temporary false break of a Right Descending Triangle. The real break happens at Point 2. This break is retested before breaking further. Point 3 shows another Right Descending Triangle breaking.
The third type of triangle has an up-slanted top line and a down-slanted bottom line. It somewhat resembles the Broadening Top pattern. This Expanding Triangle shows high volatility as stops are being ran on both sides.
Point 6 has an Expanding Triangle in GOOG. The bottom ended when a large gap was filled.