Markets tend to trend only 15-20% of the time, and spend the rest of the time correcting the trend or trading in a range (commonly referred to as a trading bracket). These corrections often take on distinctive formations and patterns, the most obvious being the triangular shape. This starts with a large retracement to set the base and then gets progressively narrower toward an apex. Finally, price will break out or break down from this triangle and it is this break that provides the signal for the next direction.
This is a 'go with' signal. A breakout would issue a buy signal and a break down would issue a sell signal. One could carry a bias in the direction of the underlying trend, but it is often desirable to remain open to a move in the other direction.
There are three classes of triangles.
This is the most balanced structure. The overhead line is roughly the same angle going down as the support line is going up, leading to the symmetrical structure. The direction of the underlying trend provides a bias for the possible direction of the next move, but given the symmetry of the structure a move in either direction is possible.
The ascending triangle
Once again, either direction is possible for the move out of the triangle. Given the up sloping nature of the triangle, however, a breakout to higher prices is more likely than a break down.
The descending triangle
This formation suggests the opposite to the ascending triangle or wedge, as it is sometimes called. In this case there is a greater probability for price to break down out of the triangle than to breakout and rally to higher prices.
© The MacLean Group Pty Ltd ACN 096 967 038. All rights reserved 2003. This article has been prepared by The MacLean Group and licensed to ASX. The views are those of the author and not of ASX. This material is educational and it is not intended to constitute financial advice.