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A Futures Trader’s Look at Triangles

Triangle Formations

Triangle formations have the appearance of a sound wave; the highs and lows for each period become narrower. Drawing a line across the tops of the highs and across the bottoms of the lows will create a triangle. Generally, the triangle formations occur in the middle of a trend and can be used as a method of measuring the length of the next move.

The measurement from the last high to the tip of the triangle will usually tell you the length of the next move down and vice-versa in an uptrend. The point at which the market trades outside the triangle is called the breakout. Trades should be made in the direction of this breakout.

Figure 1 Symmetrical Triangle With a Breakout to the Downside

 

 

Figure 2 Ascending Triangle

A symmetrical or equilateral triangle (all angles of the triangle are approximately equal), shown in Figure 1, does not indicate the direction likely to be taken by the emerging trend. However, an ascending triangle is typically bullish, and a descending triangle is typically bearish.

The ascending triangle conveys a simple example of increasing demand for a certain commodity with plenty of offering. If the demand persists, the offering will be absorbed by new buyers or by owners adding to their existing positions. The old shorts will add to their positions and as the market breaks out, the shorts will have to dispose of part or all of their holdings. A descending triangle, of course, does the opposite. (Figure 2)

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