The emergence of the triangle pattern, which is one of the most frequently used patterns of technical analysis used to determine the price movements of financial assets, dates back to the early 20th century, when the Dow Theory was introduced. A triangle pattern occurs when the price of a financial asset is squeezed. Before the volatility of the financial asset slows down, that is, before the price is squeezed, the trend lines forming the pattern are drawn. The pattern is complete when the price is squeezed between these lines. The name of the pattern comes from the lines forming the triangle shape on the price chart.
Investors make use of the triangle pattern to predict the direction of the market and the potential breakout point before placing short-term orders.
Three commonly used triangle patterns are as follows:
The ascending triangle is the pattern formed when the price of a financial asset is squeezed between a horizontal resistance line and an upward trend line. Based on the ascending triangle, investors predict that the price of the financial asset will increase and there will be an upside break. When the price rises above the resistance level, investors interpret it as a potential bullish sign and take a position in anticipation. However, if the price does not rise above the resistance level, investors think that there will be no bullish movement.
A descending triangle is the pattern formed when the price of a financial asset is stuck between a horizontal support line and a downtrend line. Based on the descending triangle, investors think that the price of the financial asset is losing strength and it may experience a downside breakout. When the price drops below the support line, investors anticipate that it will enter a potential downtrend. If the price of the financial asset does not break the downside support level and stays in the formation, investors think that it will remain without volume for a while. They open short-term positions at potential support levels.
A symmetrical triangle is a pattern in which the exact direction of the price cannot be interpreted by investors. The direction depends entirely on its breakout. Since the formation can develop in both directions, it is considered a neutral pattern. Investors think that if the price of the financial asset breaks upwards and breaks the resistance line, the direction of the price will be positive, while if the price moves downwards, they interpret it as a downtrend.
It is important to note that triangle patterns are not a guarantee of future price movements and investors should always consider using a combination of fundamental and technical analysis before making any investment decisions.