Why Do Traders Use Triangle Patterns?
Who are Traders?
Traders are a group of people who make their living off of the financial markets by buying and selling securities. They use a variety of tools, such as chart patterns, to predict which assets are on the rise and which are about to experience a decline in value. Some traders might even opt for using Fibonacci levels or other technical analysis tools to help them better gauge when it's time to buy or sell at market prices.
For many traders, though, there is nothing more reliable than the classic triangle pattern. These patterns are seen regularly on charts, and they tend to be indicative of a trend that should continue once the pattern is completed (as long as the trader doesn't get too greedy or impatient). While not a technical indicator in and of itself, this chart pattern is one that has been around as long as the technical analysis itself.
What is a triangle pattern?
The first thing that comes to mind when people hear the word "triangle" is an equilateral triangle. The three sides of a triangle are all equal, and each point lies on a straight line with the opposite end connecting with the apex. When this happens, you have what is known as an inverse relationship between price and volume. Traders can use volume to determine which way the price of an asset will go next.
The triangles of profit are based on the same concept, but they are not as straight as equilateral triangles. The price of an asset tends to rise after a triangle is formed and then reach a peak around the apex. Once this happens, the price will tend to decline toward the base of the triangle and eventually come back down. Thus, you have a head-and-shoulders pattern--one that ideally has a peak that is higher than that at the base.
Since a triangle is not exactly geometric, it is subject to interpretation by the trader. For example, if one side of a triangle is longer than another, this does not mean that the price of an asset will rise. A trader might bet on a decline instead. He or she may decide that the long side represents an overbought condition and that this would lead to a decline in value sooner rather than later.
There are many different types of triangles in the market. Some of the most famous ones are symmetrical triangles and ascending triangles. The latter are also referred to as channels. Symmetrical triangles appear when an asset hits a certain high or low. The price then continues to trade sideways, forming a pattern that has a distinct shape that can be identified on the chart. This is where the shoulders come in, as they signal an increase in volatility before the pattern breaks out again in one direction or another.
In an ascending triangle, the price of an asset tends to rise and then reach a peak before declining over time. In this pattern, the apex of the triangle needs to be higher than that of its base. The price will ultimately reach a point that is higher than that at the start of the pattern. This pattern can be used as a guide for traders who have been waiting out a downtrend in prices by spotting when momentum has taken over.
Triangles are not just limited to chart patterns, though. You will also find triangles within an indicator. A trend line that is above or below the moving average is a good place to start. In addition, you could also identify converging lines and parallel lines.
There have been many theories used to explain why traders use triangle patterns, but most experts agree that it is because it represents part of a larger trend. This means that a trader can use the pattern to determine the direction of a move and then place his or her bets accordingly.
Why do traders use triangle patterns?
To identify the continuation of a trend: Triangle patterns are one of the most reliable tools that can be used to help predict whether a trend will continue.
To determine when to take profits: Traders use triangle patterns to determine when at least a portion of their gains (or losses) should be taken off the table.
To get a sense of direction: The ultimate goal of any trader is to make money, but it's also important to not lose money in the process. Trades that don't move in the right direction may be worth exploring more thoroughly (and perhaps with a different set of indicators).
To decide which assets to buy or sell: When looking for trading opportunities, using a classic pattern is often a safer bet. This is because most technical indicators are much more likely to signal stop losses on the upside than those on the downside.
To determine the relative strength of a trend: Triangle patterns are often used to determine whether a trend is running strong or weak.
To pick overbought and oversold areas: When searching for buying and selling opportunities, many traders will also look at these patterns in order to better gauge where the market may be headed.
Among these are dynamic triangles that often indicate that a reversal will happen soon after the market begins to move slightly up or down.
Within the financial markets, many professional traders of all types use these patterns to better determine which assets are poised to rise in value and which are in the early stages of a major fall. While there is no way to guarantee success when trading, using a classic triangle pattern is likely to end up with more winning trades than losing ones.