What Are Triangle Patterns & Formations for Crypto Trading?
Trading requires patience and passion for learning different techniques. Of course, it involves the inevitable trial-and-error phase plus the disappointments along the way. The idea is not to give up and keep refining the ideal strategies that work perfectly for you. So, to formulate a perfect trading plan, understanding the chart formations and indicators is crucial. Ultimately, to help traders speed up the path towards ultimate success. Above all, knowing the triangle patterns and formations does more good than harm.
Not only it gives traders a more holistic picture of the full risk and potential reward in a trade, but it’s also useful to develop breakout or anticipation strategies, especially when you’re day trading in crypto, forex, or stocks. Besides, often, these patterns provide low volatility entries compared to other chart patterns.
Table of Contents
- What Is the Triangle Pattern?
- Why Do Traders Use Triangle Patterns?
- Ascending Triangles
- Descending Triangles
- Symmetrical Triangle
- Triangle Pattern Timescales
- How to Crypto Trade with Triangle Patterns?
- How to Test the Triangle Strength?
- The Key Considerations When Trading With Triangle Patterns
- How do Triangle Patterns help in Position Sizing & Risk Management?
- Closing Thoughts
What Is the Triangle Pattern?
Triangle patterns refer to chart formations comprised of multiple candlesticks enclosed within two converging support and resistance lines. The two converging lines depict the shape of a triangle. These patterns are important because it’s helpful to indicate the continuation of a bullish or bearish market.
Plus, triangle patterns have a high probability of success, especially as a continuation pattern of the existing primary trend. Hence it’s useful for traders to benefit from the trendline along with a converging price range.
Why Do Traders Use Triangle Patterns?
Traders use triangle patterns as they provide a very objective way to test a market direction and potential breakout without allowing a high stop-loss potential. Triangles provide a sharp entry point near the breakout levels and, many a time, give vital clues through low volumes ahead of a breakout.
In technical analysis, we can distinguish three types of triangle patterns:
Ascending triangles can be defined as price action formations where we have a horizontal top and an up-sloping bottom. A breakout can be either on the upside through the horizontal resistance or on the downside piercing the rising slope.
So, when you connect minor-highs using a horizontal trend line and use a rising line to connect the minor lows, you will get an Ascending Triangle. The ascending triangle patterns usually form after one to two months. It is calculated mostly from the start of the pattern to the breakout and not until the apex.
The volume goes down as the price oscillates between the resistance and the support several times. The pattern is valid only if the price forms two distinct minor highs before any breakout. The trendline meeting happens at the triangle’s apex, but prices can break out long before that.
The price action must fill the body inside the trendline before moving outside the boundaries; prices shouldn’t move along just one of the trendlines.
During the initial stages of the formation, the volume action will be heavy. Still, as the price action confines within the boundaries, the volume subsides and might even be abnormally low just before the breakout (which happens on heavy liquidity.) The volume action given here is an ideal formation, but variations are not uncommon. Particularly, upside breakouts should be followed by heavy volume. But for the downside breakout, low volume action performs better.
Considerations of The Triangle Patterns
On the contrary, the ascending triangle pattern is prone to false breakouts; even the volume action is similar to a genuine momentum. A false breakout will re-enter the formation’s body and most probably will restart the move within a few days. The pattern is usually a continuation of the existing trend before the triangle formation.
After a successful breakout, prices move away. But could re-test areas near the breakout point before gaining momentum. It is essential to watch out for the significant trend’s resistance or support zone before trading on this pattern. As an opposing price cluster against the pattern breakout’s direction decreases the chances of a successful trade.
Also, be wary of a conflict with the broad market direction – it is another performance killer.
For upward breakout – it is better to concentrate on patterns with prices near the yearly highs or lows and avoid those forming near the middle of the annual trading range. There is no particular difference in performance regarding the pattern formation in the case of downward breakouts.
It is better to have a gap during the downside breakout, while on the upside breakouts, it is immaterial.
How Did the Ascending Triangle Breakout Happen?
Most of the ascending triangle breakout happens near 62% distance from the start of the formation to the apex.
Another critical aspect to note is that upward breakouts take more time to reach their target than downward breakouts.
The pattern’s height directly impacts the ultimate results. Usually, they perform better than short ones in all market directions and conditions. If the breakout is in the direction of the prior trend, then tall and wide patterns perform best, while counter-trend breakouts perform best with tall and narrow patterns.
Descending triangles represent a bearish pattern in which the price formation should consist of a flat support line and a falling top; breakouts can be upward or downward. While a downside breakout during a bear market can result in substantial gains.
In this pattern, the prices tend to keep falling to the same area and bounce back each time, but the bounce’s height is lower than the preceding price. Volume usually follows a receding trend from the start of the formation, but it is not a critical benchmark. The volume will mostly be relatively low just before the breakout and then explodes during the subsequent action.
As discussed during the ascending triangles, you should not ignore a breakout just because of the volume action. Many successful breakouts happen on low volumes too.
Similar to ascending triangles, the breakout could also happen ahead of the support and resistance lines’ meeting point. The formation body should have at least two minor lows- touching the horizontal support line. The moves touching the bottom line should be distinct, and you should count the touches in the same consolidation together.
How Did the Descending Triangle Breakout Happen?
The breakout can be in any direction, irrespective of the primary trend: Descending triangles might be a reversal pattern or a continuation pattern. There is a chance of no breakout after the formation, and prices continue to roll near the triangle apex.
The formation usually results in more downside breakouts than one in the upside. However, as discussed earlier, an upside breakout confirming the prior trend performs much better than the downside action.
Studies suggest that more than 84% of all upside breakouts in a bull market completes the target price journey.
The price might return to the breakout point, usually within two weeks, and will restart the momentum soon, most of the time. As for the earlier horizontal support, it acts as a resistance and the slope as a support if the price retraces after a breakout.
Key Considerations of A Descending Triangle
What considers a correct descending pattern is when there are more than two distinct minor high-low moves for a good pattern. Without enough crisscross movements during the pattern formation, the descending triangle will not be valid.
It is more fruitful to focus on the upward breakout in this pattern, as they result in more than a 45% rise in a bull market and 25% upside even in a bear market. When successfully reversed in a bull market, even a failed downward breakout results in a more than 50% jump in prices.
Generally, the number of days to achieve the target in an upside breakout is much higher than downward action.
Symmetrical triangles are price formations where both support and resistance lines are sloping and converging towards one another. The resistance line falls downwards from the top while the support line rises upward from the bottom.
Like the rest of the triangle patterns, it is critical to have at least two minor highs and lows. It would be best if you counted only the distinct touches to check the pattern validity. The price action should fill the space between the two sloping lines, and there shouldn’t be many blank spaces within the body.
The volume usually recedes during the formation. However, it can also be irregular at times. The volume touches the nadir just before the breakout.
Symmetrical Triangles usually take more than three weeks to establish. The breakout direction can be either on the upside or downside. The formation can sometimes result in no breakout, resulting in lackluster moves.
An exciting add-on to this pattern is that a busted pattern gives a better result than the original breakout trade. That, if a triangle breaks out, but fails to move more than 5% and then comes back, and pierce through the other side of the symmetrical triangle, the new trade, which is the complete opposite to the original breakout direction, might result in a much more fruitful result. Also, a reversal like this can give exciting returns if the move happens in the primary trend direction.
Symmetrical triangles provide the best returns when traded in the direction of the existing trend in the broad market: trade upward breakouts in a bull market and downward breakouts in a bear market. Nevertheless, even in a bear market, the upward breakout can give 15% gainers with low failure rates.
Typically, traders prefer to do range trading using the formation’s body and stay out when the area narrows near the apex.
Triangle Pattern Timescales
- Ascending Triangle patterns take around two months to form, calculated from the start of the pattern to the breakout and not till the apex.
- Descending Triangle patterns usually take 55 days to form in a bull market and 62 days in a bear market, from formation start to the breakout.
- Symmetrical Triangle patterns usually take around 50 days to form, from the start to the breakout.
How to Crypto Trade with Triangle Patterns?
Cryptocurrencies like Bitcoin are often in the news for their volatile behavior, rising and falling fast. Even a 10x move in less than a year is not very surprising in the crypto world. Triangles can often give an advance indication of an explosive move. Let’s check a recent symmetrical triangle formed on the BTC/USD price chart.
The daily candles resulted in a symmetrical triangle in December, and a breakout after that took Bitcoin above $40k within a few weeks. The breakout exemplified the power of triangles to help you catch big moves at the right time.
The formation indicated a high chance of success on the upside as the primary trend has been bullish.
Now, we are in a strong bull market in the crypto space. A lot many opportunities, like the above in Bitcoin, can happen. It is the right time to learn and use triangle patterns to benefit from huge moves.
How to Test the Triangle Strength?
As you have seen earlier, the triangle formations are valid only if the price moves back and forth between the two trend lines multiple times. There shouldn’t be many blank spaces in the price formation, meaning the price shouldn’t meander along, touching one of the boundaries all the time before a breakout. A minimum of two distinct minor highs and minor lows must be present in the price formation.
The Key Considerations When Trading With Triangle Patterns
It is essential to understand those false breakouts are common in the Triangle Patterns and be mentally prepared for that. Other patterns like the Wedge or Flag look similar; you should be able to distinguish between them.
Make sure the pattern touches the border lines at least two different times before a breakout.
Just ahead of a breakout, usually, the volume dries up. Understand the volume behavior in the patterns and be alert if you find unusual developments.
How do Triangle Patterns help in Position Sizing & Risk Management?
Triangle expected minimum move after a breakout is equivalent to the formation’s height at the triangle’s start. Suppose the breakout fails to sustain and falls beyond the triangle’s other boundary, exit immediately with a loss. A busted pattern can also provide you with a critical profit opportunity if you join the movement in the opposite direction of the initial trade.
False breakouts are common in triangles, and hence cutting a position only because it re-enters the triangle body will result in missed opportunities and unnecessary loss booking. Often, the second breakout will be far more successful after a failed first breakout.
You shouldn’t risk more than 2% of your account value when entering a triangle breakout. Your stop-loss value will be almost equivalent to the breadth of the pattern at the time of breakout. A successful move or opposite side entry in a busted breakout can give a return much higher than your initial planned loss.
Triangle’s real value is its ability to minimize your risks and maximize profits in crucial junctures by providing a precise term of reference for your action.
Calculate your stop-loss and determine how many units of cryptocurrencies you can take in a single position on a 2% of account value as the maximum loss limit for a single trade. Always take a position size below that limit.
By studying triangle formations, you have grabbed an essential tool for your successful trading journey. Practice every day to successfully identify these patterns and test them in a demo account before employing real money.
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