Symmetrical Triangle

The symmetrical triangle, whichcan also be referred to as a coil, usually forms during a trend as acontinuation pattern. The pattern contains at least two lower highs and twohigher lows. When these points are connected, the lines converge as they areextended and the symmetrical triangle takes shape. You could also think of itas a contracting wedge, wide at the beginning and narrowing over time.

Trend: In order to qualify as acontinuation pattern, an established trend (at least a few months old) shouldexist. The symmetrical triangle marks a consolidation period before continuingafter the breakout.

Four (4) Points: At least 2 pointsare required to form a trend line and 2 trend lines are required to form asymmetrical triangle. Therefore, a minimum of 4 points are required to beginconsidering a formation as a symmetrical triangle. The second high (2) shouldbe lower than the first (1) and the upper line should slope down. The secondlow (2) should be higher than the first (1) and the lower line should slope up.Ideally, the pattern will form with 6 points (3 on each side) before a breakoutoccurs.

Volume: As the symmetricaltriangle extends and the trading range contracts, volume should start todiminish. This refers to the quiet before the storm, or the tighteningconsolidation before the breakout.

Duration: The symmetrical trianglecan extend for a few weeks or many months. If the pattern is less than 3 weeks,it is usually considered a pennant. Typically, the time duration is about 3months.

Breakout Timeframe: The idealbreakout point occurs 1/2 to 3/4 of the way through the pattern's developmentor time-span. The time-span of the pattern can be measured from the apex(convergence of upper and lower lines) back to the beginning of the lower trendline (base). A break before the 1/2 way point might be premature and a breaktoo close to the apex may be insignificant. After all, as the apex approaches,a breakout must occur sometime.

Breakout Direction: The futuredirection of the breakout can only be determined after the break has occurred.Sounds obvious enough, but attempting to guess the direction of the breakoutcan be dangerous. Even though a continuation pattern is supposed to breakout inthe direction of the long-term trend, this is not always the case.

Breakout Confirmation: A breakshould be on a closing basis for it to be considered valid. Some traders applya price (3% break) or time (sustained for 3 days) filter to confirm validity.The breakout should occur with an expansion in volume, especially on upsidebreakouts.

Return to Apex: After the breakout(up or down), the apex can turn into future support or resistance. The pricesometimes returns to the apex or a support/resistance level around the breakoutbefore resuming in the direction of the breakout.

Price Target: There are twomethods to estimate the extent of the move after the breakout. First, thewidest distance of the symmetrical triangle can be measured and applied to thebreakout point. Second, a trend line can be drawn parallel to the pattern'strend line that slopes (up or down) in the direction of the break. Theextension of this line will mark a potential breakout target.

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