Continuing with the classic chart patterns, we will be discussing Triangles. There are three types of triangles – Ascending, Descending and Symmetrical Triangle.
An Ascending Triangle is a bullish formation that anticipates an upside breakout whereas Descending Triangle is a bearish formation that anticipates a downside breakout. Symmetrical Triangle, where price action grows increasingly narrow, may be followed by a breakout to either side, up or down.
Ascending Triangle patterns are bullish and their appearance indicates that a security’s price is likely to climb higher as the pattern completes itself. It is recognisable by a right triangle created by two trend lines.
In such type of triangle, one trend line is drawn horizontally at a level that has historically prevented the price from heading higher and the second trendline connects a series of increasing troughs. Eventually, price breaks through the upside resistance and continues in an uptrend.
A Descending Triangle is a bearish chart pattern and is created by drawing one trendline that connects a series of lower highs and a second horizontal trendline that connects a series of lows.
This pattern develops when a security’s price falls but then bounces off the supporting line and rises. However, each attempt to push prices higher is less successful than the one before, and eventually, sellers take control of the market and push prices below the supporting bottom line of the triangle.
Symmetrical Triangles represent a period of consolidation patterns that may forecast either the continuation of the existing trend or a trend reversal. In other words, it may represent a breakout or breakdown.
A breakdown from the lower trendline marks the start of a new bearish trend, whereas a breakout from the upper trendline indicates the start of a new bullish trend.
The author is Associate Vice President, Analyst-Derivatives at Motilal Oswal Securities.
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