The symmetrical triangle pattern is a reliable pattern that gives the trader a hint of when a stock might breakout. It also gives us a price target. This pattern appears quite regular in stock charts and they often hint to a continuation of the prior move. The symmetrical triangle in itself is neither bullish nor bearish. However, it often breaks out in the direction of the previous trend. For example, if the stock was in an uptrend and a symmetrical triangle appears, it is very likely that the stock may break higher.
The diagram above is what a symmetrical triangle looks like. Its pretty easy to spot with a little practice. The stock starts with wide erratic movements and then price slowly contracts and meet at the tip of the triangle before breaking out. Sometimes, the price will not meet but will breakout in advance. But its still possible to spot this pattern.
To be a valid pattern, some traders require there to be two converging trendlines that touches 3 highs and 3 lows. However, I try not to be rigid. Traders should know when to be flexible. If there are 3 highs and 2 lows or sometimes even 2 highs and 2 lows, that is alright for me. Often times, in a strong trending stock, you don't get too much corrections and rallies before the stock breaks out. This is where experience and a trader's judgment is required.
The chart of FDX above shows us what a real life symmetrical triangle looks like. The stock will have a wide erratic price movement at the start of the pattern. Then the volatility slowly contracts and the chart pattern becomes very visible to many observant traders. At this point, we do not know which way it might breakout. As the two trendlines converge, it tells us that a breakout is about to happen. The moment the stock breaks above or below the pattern, the symmetrical triangle starts to do its work. In this case, the stock broke to the upside and thus it had a bullish breakout.
Notice how the height of the pattern gave us a nice price target. Since this stock is moving in an uptrend and above its rising 20 MA, 50 MA and 200 MA, the trend follower can take partial profits at the 1st target. Then he or she can ride the other half higher using a trailing stop. In this case, we can use the 20 MA. Once the stock breaks below the 20 MA, we can take profits on the other positions.
One of the beauties of this pattern is its ability to give the trader a 1st price target. You can take the height of the pattern and project it upwards from the tip of the pattern to get a price target. This price target is not a fixed target. If the stock is in a strong uptrend, it can move higher. So, the trader should treat it as an initial price target. On the other hand, if the price target is where resistance is, then the trader might want to take all of the profits off the table.
Another great thing about this chart pattern is its ability to give the trader a good timing for the breakout. As the two uptrendlines and downtrendlines converge, the likelihood of a breakout happening becomes higher and higher. So, the trader should put an alarm and take action when the alarm goes off.
There is no bullish symmetrical triangle or bearish symmetrical triangle. The chart pattern is neutral but where it happens will give us a bullish bias or bearish bias. To have a bullish bias, the stock needs to be:
The reason why we want to satisfy the above criteria is because of the maxim "the trend if your friend". A trend that is in motion tends to stay in motion. Therefore, a symmetrical triangle that happens in an uptrend tends to have a bullish bias compared to a symmetrical triangle that happens in a downtrend.
In the chart above we can see how Google (now Alphabet Inc) formed a symmetrical triangle. The stock was slowly drifting higher and was above its rising 200 MA. Therefore, the pattern was bullish bias. See how the stock rose when it broke above the symmetrical triangle. Since the stock was in an uptrend, the trader should hold the stock a bit longer and ride the trend higher using a trailing stop to take profits.
PCLN is a great example of how the symmetrical triangle can give us a price target. The stock formed the pattern and broke out higher. Since the stock was above its 20 MA, 50 MA and 200 MA and it is in an uptrend, therefore the bias should be bullish. Notice how the height of the pattern gave a perfect textbook example of when to take profits. The stock met the target and then gap down. Perhaps because of some news or earnings. Traders should always remember to close positions before an earnings call.
Paypal is another good example of a symmetrical triangle. The stock was in an uptrend and above its rising 20 MA, 50 MA and 200 MA. Therefore, the breakout should be to the upside because of the bullishness of the stock. Once the stock broke above the upper trendline it shot higher and met its target. It is still in an uptrend and therefore the trader should remain bullish on this stock till the trend changes.
Now that we have learn this chart pattern, how do we enter this trading setup? The way to enter this pattern is easy. Just buy the stock when it breaks out of the upper trendline. Put a stop at the lows of the lower trendline. Depending on how aggressive you are, you can put the stop at the first low nearest to the breakout or the low when the pattern started to form. The further away your stop loss, the less aggressive your trade will be but it will be much safer. The nearer your stop the more aggressive your trade is. But you get to have better risk reward.
In the chart above, a trader can buy Visa the moment it trades above the upper trendline. Then the trader can put a stop at the first low which is also where the 50 MA support is. When the stock reaches the first target, the trader can sell half of the positions and keep the other half and ride it higher.
For a bearish symmetrical triangle, the trader should look for a stock that is forming the symmetrical pattern when the stock:
That way, you are choosing a stock that has a negative aura around it. Therefore, when a symmetrical triangle forms in the stock, the bias for the pattern will be bearish. That is how you put the odds in your favor.
In the chart above, SPB formed a symmetrical triangle and broke down lower. The stock was already making a higher low. It was also trading below its 20 MA, 50 MA and 200 MA. Therefore, the bias for the chart pattern in this stock is bearish. Look how far the stock collapsed.
MNK is a good example of why you should be bearish when the pattern forms below the declining 200 MA. Although the stock broke out above first, it quickly formed a topping tail and collapsed below the lower trendline. This is called a failure breakout and because of the failed expectation, the stock quickly declined.
The height of the pattern gave traders a very good price target. When you project it downwards from the tip of the pattern, that is very near where the stock started to rally back up again.
Since the bearish symmetrical triangle is a valid chart pattern, we can use it to find trading opportunities to the short side. A trader can enter a short trade when the stock trades below the lower trendline. Then he or she can put a stop loss at the upper trendline. Where you place the stop loss depends on how aggressive a trader you are. Take a look at the chart below.
KEG formed a symmetrical triangle around May 2017. Since the stock has already made lower highs and is below the 20 MA and 50 MA, then the bias for the pattern is to the downside. Traders can short the stock as it breaks the lower trendline and put the stop loss at 3 places. The stop loss is the rallies at the trendline. Depending on how aggressive you are, you can choose the best place to place a stop loss depending on your risk appetite. When the stock dropped to the 200 MA it was time to cover the short.
The symmetrical triangle is neither bullish nor bearish. A bias is made by looking at the preceding trend and movement. This chart pattern appears quite regularly in stocks and can be a great opportunity for you to find trading opportunities to the long side or short side.
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