What is a Triangle Formation?
A symmetrical triangle consists of two symmetrically converging support and resistance lines, defined by at least four significant points. (See Figure 5.25.)
The two symmetrically converging lines suggest that there is a balance between supply and demand in the foreign exchange market. Consequently, a break may occur on either side. In the case of a bullish symmetrical triangle, the breakout will occur in the same direction, qualifying the formation as a continuation pattern.
The descending triangle is simply a mirror image of the ascending triangle. It consists of a flat support line and a downward sloping resistance line. (See Figure below) This pattern suggests that supply is larger than demand. The currency is expected to break on the downside. The descending triangle also provides a price objective.
This objective is calculated by measuring the width of the triangle base and then transposing it to the breakpoint. As shown in Figure 5.29., the support line, defined by points A, C, E, and G, is flat. The converging top line, defined by points B, D, F, and H, is sloped downward. The price objective is the width of the base of the triangle (AA), measured above the support line from the breakout point I (IF.)
The expanding (broadening) triangle consists of a horizontal mirror image of a triangle, where the tip of the triangle is next to the original trend, rather than its base. (See Figure below) Volume of an expanding triangle also follows the horizontal mirror image as it increases steadily with the chart formation.
As shown in Figure 5.30, the bottom support line, defined by points B, D, and F, and the top line, defined by points A, C, and E, are divergent. The price objective should be the width of the base of the triangle (GG), measured from the breakout point G.