Trading
Call: Sell below the level of 0.9850 Stop Loss of 1.0200 Target of 0.9300 – 0.8750
– 0.8150 levels.
CMP
is 0.9840
A
symmetrical triangle pattern is relatively easy to identify. In addition,
triangle patterns can be quite reliable to trade with very low failure rates.
There is a caution concerning trading these patterns, however. As mentioned
previously, a triangle pattern can be either continuation or reversal patterns.
Typically, they are continuation patterns. To achieve the reliability for which
the triangle is well known, technical analysts advise waiting for a clear
breakout of one of the trendlines defining the triangle.
1.
Occurrence of a
Breakout
- Technical analysts pay close attention to how long the triangle takes to
develop to its apex. The general rule, as explained by Murphy, is that prices
should break out - clearly penetrate one of the trendlines - somewhere between
three-quarters and two-thirds of the horizontal width of the formation.6 The
break out, in other words, should occur well before the pattern reaches the
apex of the triangle. . Adherence to this rule is strongly advised by Yager,
She adds that the closer the breakout occurs to the apex the higher the risk of
a false breakout.
2. Price Action - Unlike ascending and descending triangles which give advance
notice of their intentions, the symmetrical triangle tends to be a neutral
pattern. Murphy advises that the symmetrical triangle is generally a
consolidation pattern. This means an investor can look to see the direction of
the previous trend and make the basic assumption that the trend will continue.
However, many experts advise investors that because the breakout direction could
go either way that they wait until the breakout occurs before investing in or
selling the stock. Schabacker refers to a symmetrical triangle as a
"picture of hesitation.
3. Measuring the Triangle - To project the minimum short-term
price objective of a triangle, an investor must wait until the price has broken
through the trendline. When the price breaks through the trendline, the
investor then knows whether the pattern is a consolidation or a reversal
formation. To calculate the minimum price objective, calculate the
"height" of the formation at its widest part - the "base"
of the triangle. The height is equal determined by projecting a vertical line
from the first point of contact with the trendline on the left of the chart to
the next point of contact with the opposite trendline. In other words, measure
from the highest high point on one trendline to the lowest low point on the
opposite trendline.
Both these points will
be located on the far left of the formation. Next, locate the "apex"
of the triangle (the point where the trendlines converge). Take the result of
the measurement of the height of the triangle and add it to the price marked by
the apex of the triangle if an upside breakout occurs and subtract it from the
apex price if the triangle experiences a downside breakout.
For example, working
with a symmetrical triangle, assume the highest high of the pattern occurs at
100 and the lowest low at 80. The height of the pattern is 20 (100 - 80 = 20).
The apex of the triangle occurs at 90. The pattern has an upside breakout.
Using the measuring rule, the target price is 110 (90 + 20 = 110).
4. Duration of the Triangle - As mentioned before, the triangle is a
relatively short-term pattern. It may take up to one month to form and it
usually forms in less than three months.
5. Forecasting Implications - Once breakout occurs, the symmetrical
triangle tends to be a reliable pattern. Bulkowski calculates failure rates
ranging between 2% and 6% for symmetrical triangles after a valid breakout.
To avoid
mistaking a false move for a valid breakout, experts advise waiting a few days
to see if the breakout is dependable. According to Murphy, minimum penetration
criteria would be a closing price outside the trendline and not just an
intraday penetration. Investors do have time once a breakout has occurred.18
According to Bulkowski, when considering symmetrical triangles, an investor
will have over five months to reach the ultimate high after an upside breakout
and less than half that time after a downside breakout
Because
premature breakouts (where prices close outside of the trendline) are so
common, don't dismiss the pattern if it has experienced such a breakout.
According to Bulkowski, however, "premature breakouts do not predict the
final breakout direction or success or failure of the formation."
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AUD/USD, working with a symmetrical triangle, the highest
high of the pattern occurs at 1.1080 and the lowest low at 0.9380. The
height of the pattern is 0.1700 pips (1.1080 – 0.9380 = 0.1700). The apex
of the triangle occurs at 0.9850. The pattern has an down side breakout.
Using the measuring rule, the target price is 0.8150
(0.9850 – 0.1700 = 0.8150).
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