Most traders, in their line of trading, rely on various chart patterns as a way to predict movements of the future price of an instrument. The triangle pattern is just one of the many well-known formations that are used, each coming in numerous forms including ascending and descending triangles. An ascending triangle traditionally was considered as a bullish tool, breaking out towards the upside, and a descending triangle bearish, breaking down to the downside.
This has been instilled within the trader’s mind for many years, and most texts can be found to this effect, as well as literally thousands of “how-to” trading videos. Most traders do not comprehend, however, that this is fundamentally flawed conventional wisdom, which leads to many expensive mistakes.
The Platform: How Most Conventional Wisdom Is Wrong
Now, let’s dissect why this is a bad way to go about it. In the classic view of an ascending triangle, the trader usually sees a succession of equal highs and higher lows. The idea behind this is that the market is “pushing up,” indicating buying pressure that should eventually lead to a breakout to the upside.
On the contrary, in a descending triangle where there are already equal lows complemented by lower highs, traders actually expect the market to break to the downside due to selling pressure. This logic, though over-simplistic, does consider the true behavior of the market.
I am a trader and can vouch from experience that these patterns don’t always behave as they should. Unfortunately for many traders, more times than not the market will break the other way and send traders into a tailspin. This is because all old school approaches completely leave out one very important ingredient or foundation for the market move, and that is the direction of momentum.
Whether there are ascending or descending triangle kinds of patterns, most trading types are neither bullish or bearish in nature. As always, their outcomes are subject to the larger market’s rhythm or momentum.
The Solution: Trading Triangle Patterns with Momentum Analysis
How would you know in which direction the triangle pattern is going to break? The trick lies in shifting your focus away from the pattern itself to the momentum analysis. Momentum deals with the strength of money flow in the market that changes and dictates the price movement. To make precise trading decisions, you need to make an analysis of momentum on a higher time frame.
Here’s a step-by-step approach to effectively trade the triangle patterns:
- Identify the Triangle: Identify the triangle first on a lower time frame chart, such as a 15-minute or 1-hour chart.
- Confirm Higher Time Frames: Switch to a higher time frame—4-hour or daily chart—and check the overall momentum. You want to see if the market’s momentum is in the direction of your lower time frame pattern.
- Watch for Momentum Shifts: Be on the lookout for changes in momentum. For instance, while an ascending triangle is forming but a higher time frame is showing that the bullish momentum is weakening, be very cautious in assuming a breakout to the upside.
- Enter Early, Not at the Breakout: The best thing you could probably do is trade inside the consolidation phase before it breaks out. This will make sure that you enter the trade early, and the majority of traders don’t see the breakout and then push the price further in your intended direction.
The Importance of an Objective Approach
One of the major problems with trading triangle patterns is the subjectivity with drawing the trendlines in and identifying the highs and lows. Many traders won’t agree on where to connect the points, which will result in unstable analysis and perhaps a fundamentally flawed trade setup. Prefine cycle highs and cycle lows using an objective method before you begin. You may do this by utilizing specialized pointers designed to find objective perimeters on the chart to aide you in drawing your triangles quickly and consistently.
One of these tools is a cycle indicator, which defines objective highs and lows on a mathematical basis. The approach will not only make your triangle analysis consistent, but it also offers a rule-based system that will add value to your trading. For traders looking to add this into their strategy, indicators such as this can be located and customized through webinars on indicators or charting packages that offer video tutorials on how to set up and use.
Trading Triangle Patterns the Right Way
Although most traders only consider that the triangle in the upwards direction breaks to the upside and on the downside when in the descendant formation, this view tends to stay out of their thinking. Successfully trading these patterns with triangle formations demands awareness of how market momentum flows, to verify the setup trade accordingly.
They have always kept in view that one must only perceive any real pressure level from larger time frames as either selling or buying. This should never take your position completely by an ordinary pattern shaped like a triangle.
With a solid momentum analysis together with objective pattern identification, one can be more confident and accurate in trading triangle patterns. Remember, the aim is to get in before the breakout, not after. That way, you’ll be trading smart, not just following popular beliefs.
