Trading Call: Buy at the level of 55.5 Stop Loss of 54.6 Target
of 56.60 – 58.10 – 59.75 levels.
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."
USD/INR,
working with a symmetrical triangle, the highest high of the pattern occurs at
56.5 and the lowest low at 51.85. The height of the pattern is 4.65 pips (56.5
– 51.85 = 4.65). The apex of the triangle occurs at 55.10. The pattern has an
down side breakout. Using the measuring rule, the target price is 59.75 (55.10
+ 4.65 = 59.75).
