The Triangle is a continuation pattern using the concepts of support and resistance and price breakouts.
The chart below of Amazon.com (AMZN) shows the Triangle continuation pattern:
Generally, when prices make significant moves, they go through a period of resting. Usually with a Triangle pattern, the price consolidation period consists of higher lows and lower lows, forming the shape of a "triangle". When the resistance and support lines (see: Support & Resistance) begin converging, price will usually burst out of the consolidation area andresume trending in the direction that prices have been moving previously.
Triangle Breakout Buy Signal
The signal to buy is given when the resistance line is penetrated to the upside. The signal is generally stronger if prices have been in an uptrend prior to the upside breakout.
Triangle Breakout Sell Signal
A sell signal occurs when the support line is penetrated to the downside. Usually the sell signal is considered stronger if prices have been in a downtrend prior to the downside breakout.
Two other closely related variants of the Triangle pattern are the Ascending and Descending Triangle pattern; these two patterns are shown next.
Ascending & Descending Triangles
Two closely related variants of the Triangle pattern are the Ascending and Descending Triangle pattern; these two patterns are shown below in the chart of the 100 ounce Gold futures:
Ascending Triangle
An Ascending Triangle is viewed as being more bullish than the regular Triangle patterns. With an Ascending Triangle, higher lows are being made (bullish sign) and sometimes higher highs are being made (also a bullish sign).
Ascending Triangle Buy Signal
As with the regular Triangle formation, the Ascending Triangle gives a buy signal when the resistance line is penetrated to the upside. Also, the signal is generally stronger if prices have been in an uptrend prior to the Ascending Triangle and upside breakout.
Descending Triangle
The Descending Triangle is viewed as being more bearish than the regular Triangle patterns. When a Descending Triangle is formed, lower lows are being made (bearish sign) and quite often, lower highs are being made (generally seen as bearish).
Descending Triangle Sell Signal
With the Descending Triangle formation, a sell signal occurs when the support line is penetrated to the downside. Traders usually view the sell signal as being stronger if prices have been in a confirmed downtrend prior to the Descending Triangle formation and downside breakout.
The Triangle formation is an effective chart analysis tool for placing buy and sell orders. A similar chart formation is the Flag pattern (see: Flag).
