The Symmetrical Triangle
The symmetrical triangle (or coil) pattern normally occurs during a trend as a continuation pattern. It is essentially a coin flip as to which direction price will exit if it is truly a Symmetrical Triangle. The triangle includes at least two higher lows and two lower highs. Essentially, the trading range becomes smaller and smaller within the triangle.
Although it is possible for symmetrical triangles to signal important trend reversals, they are far more likely to signal a continuation of the current trend. Which direction the next big move will be can only be established once a breakout (or breakdown) is confirmed.
What to Look For
Trend: To be considered a continuation pattern, a clear trend should be present. The trend is usually a month old or more, with the symmetrical triangle pattern marking the consolidation period before pursuing the same trend following a breakout (or breakdown).
Four Point Touch: In order for a trend line to be confirmed, at least 2 touch points are needed, therefore 2 trend lines are needed to form the symmetrical triangle pattern. Essentially a minimum of 4 touch points are needed to begin considering the formation of a symmetrical triangle. Lets look over ABEV as an example in the chart below. The second high (2) should always be at a lower price than the first high (1), which will form the down sloping resistance line. The second low (4) should always be higher than the first low (3), which will form the up sloping support line. Ideal patterns form with 6 points (3 on each side) before a breakout occurs.
Volume: During the life cycle of the symmetrical triangle pattern, as the trading range decreases, as should the volume. This refers to the tightening consolidation before the breakout (or breakdown).
Time Span: The symmetrical triangle can last anywhere from a few weeks to several months. If the same pattern is found in a time period of less than 3 weeks, it is referred to as a pennant pattern. On average, the typical time duration is about 2-3 months.
Breakout/Breakdown Time Frame: The ideal breakout point occurs about 3/4 of the way into the development or time span of the pattern. The time-span of the pattern can be measured from the apex (where the upper and lower trend lines converge) back to where the lower trend line (base) began. A break in the pattern prior to the halfway point may be premature, and a break too near the apex may prove the pattern insignificant.
Direction of Breakout/Breakdown: The direction of the break in the pattern can only be confirmed after the break has happened. This would sound obvious enough to most, but attempting to take a guess at the direction of the break can be risky and dangerous. Though a continuation pattern is typically expected to breakout in the direction of the overall trend, that doesn’t always happen.
Confirmation of Breakout/Breakdown: For a break in the triangle to be considered valid, it should be on the basis of closing. There are traders that have a set price (3% break) or time frame (sustained for 3 days) to confirm if a breakout is valid. The true break in the pattern should happen with a substantial increase in volume, especially on breakouts to the upside.
Return to Apex: After the break, the apex may turn into a future support or resistance level. The price can sometimes return to the apex or a support/resistance level somewhere close to the breakout before continuing in the direction of the breakout.
Price Target: The most reliable method for established an estimated price target is to measure the widest distance of the symmetrical triangle, and apply the same measurement to the breakout point as shown below.
According to the book Technical Analysis of Stock Trends, often referred to as “The Bible of Stock Market Timing,” roughly 75% of all symmetrical triangle patterns are continuation patterns, with the other 25% indicating reversals. The reversal patterns especially can be difficult to analyze, as they often contain false breakouts.
Probability of false breakout = 16%
The direction of the breakout should not be anticipated, as it is carries far less risk to wait for the break to happen for confirmation. Long the breakout, and short the breakdown.
Further technical analysis should be conducted to the breakout by watching for gaps, volume, and accelerated price movements for confirmation. The price can sometimes return to the point of the apex on a reaction move, only before continuing in the direction of the initial breakout. This return can in price can offer a second chance to trade with a better risk/reward ratio.