Tuesday, September 30, 2008

What Are Symmetrical Triangles

One of my favorite chart patterns to trade is the symmetrical triangle sometimes referred to as a coil. What I like about this particular pattern is that the moves out of such a formation are usually fast and furious! A symmetrical triangle is a converging pattern which usually takes place during a time of indecision and is thought to be a continuation pattern within a trend.

In order to identify a symmetrical triangle a market must have at least 4 points so that an upper and lower trendline can be drawn. These two trendlines will converge forming the triangle. Basically the pattern will have descending highs and ascending lows and will look like this.

Notice in the above chart how the two trendlines converge forming the very distinctive symmetrical triangle formation. Also notice in this particular example that there are 6 points that make up the pattern however at the very least only 4 points are required to qualify this formation as a symmetrical triangle.

You'll notice prior to the formation of the symmetrical triangle that the trend was up which means we should only be looking to take an upside breakout from the pattern. Some traders prefer to trade both sides of the triangle breakout but in my experience I've found counter trend breakouts to be unreliable. I'd rather keep the odds on my side by only trading in the direction of the trend which means in the above example we should only be looking to take an upside breakout.

One other helpful tip when trading the symmetrical triangle pattern is to only take breakouts that form prior to the apex of the triangle. The most reliable breakouts tend to take place two thirds of the way into the pattern and not at the apex. Breakouts that occur near the apex tend to be unreliable.

Entry should be when price moves outside of the symmetrical triangle. An upside target would be the widest part of the triangle added to the breakout point.

To make things easier I will post several charts which will give you a very clear understanding as to what a symmetrical triangle is and how to trade it.

For some of you who may be thinking that this is all hindsight, I'd like you to view an actual post I made on this blog last May regarding the symmetrical triangle in the mortgage financial stocks (MFX). Below is a chart of what took place AFTER I made my post. To see the original post before the move happened you can simply click here.

I think you get the idea now as to what a symmetrical triangle looks like and how to trade it. This formation will appear on all time frames and on any freely traded market in the world. Like anything else in trading, nothing works 100% of the time. By using money management and trading this pattern, I think a trader can do quite well in the market.


Anonymous said...

Very interesting.

I have one question: about the first graph, you say that the trend is up. How do you know?
I always thought you that in a symmetrical triangle you don't know what will happen until the breakout occurs.

gianpaolo debiasi

Kevin said...

Just by looking at what the market did you can easily determine if the trend was up or down.. Just ask yourself is the symmetrical triangle above the close from 30 or 40 days ago or not... If the triangle is above the close from 30 or 40 days ago, the trend is up..Keep this very simple.

Bob said...

I'm curious on your opinion re. a theory I saw put forward by t.a. Colin Twiggs on symmetrical >s.
He suggested triangle breakouts are less reliable when they occur near the end of the length of the triangle.
If I recall correctly, he said breakouts occurring within the last 1/3 of a >'s length were less reliable as signals than breakouts occurring earlier, say in the middle 1/3 of its length.
And within that last 1/3, the closer one got to the >'s end or apex, the less likely it is any breakout would be a reliable signal.
-Any thoughts on this, I wonder?

Kevin said...

Hi bob,

If you read my post again, you will see that I said the same thing as Colin Twigs. Breakouts ocurring near the last 3rd or apex of the triangle are less reliable.


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