How to Trade and Identify Triangle Patterns, PLUS Real-Life Example in CRWD

Market Rebellion

This article was last updated on 08/30/2022.

Triangle patterns are a staple of technical analysis. By the end of this article, you will understand the logic behind triangle patterns, what the three types of triangle pattern look like, and how to trade them. 

Triangle patterns are some of the most common and powerful technical patterns. Identifying technical patterns may sound difficult at first, but once you train your eyes to look for them, you’ll find that spotting these triangle patterns on a real-life chart isn’t as hard as it sounds. 

A triangle pattern is formed when the price action of a stock moves into a tighter and tighter range as time progresses. You can think of triangle patterns as a heated battle between bears and bulls, or as two converging lines of support and resistance. Both the top and bottom lines of the triangle pattern function as trendlines — meaning triangle patterns can be used to predict powerful breakouts and breakdowns when the stock exits the range, or completes the pattern.

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The Three Types of Triangle Patterns: Symmetrical, Ascending, and Descending

triangle pattern

The symmetrical triangle, ascending triangle, and descending triangle. Source: Market Rebellion

These are the three types of triangle pattern. All three types of triangle pattern are considered continuation patterns. That means that in order for these technical patterns to be valid, they must occur in the midst of a predefined trend. For instance, because the ascending triangle is a bullish continuation pattern, the predefined trend must also be bullish. Conversely, the descending triangle is a bearish continuation pattern — meaning the precondition is an established bearish downtrend. The symmetrical triangle is a little different. Symmetrical triangles occur during periods of supply and demand indecision. These can be valid in any trend — bullish or bearish, and can provide a catalyst for an explosive price move in the event of a breakout or breakdown. 

Tip: Make sure your triangle is shaping up properly

In an ascending or descending triangle, the horizontal line should have as little variation from start-to-finish as possible. In other words, the low point of a descending triangle early in the pattern should be the same price as the low point of a descending triangle at the end of the pattern. For symmetrical triangles, the pattern should actually be symmetrical — meaning the point of convergence should be directly in the center of both trendlines. Obviously, most patterns aren’t perfect, but the more precise the pattern, the more accurate the pattern. 

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How to Tell if a Triangle Pattern is Valid

To trade triangle patterns efficiently, you’ll want to first check their validity. First, consider the three V’s.

Check the velocity of the pre-existing trend. If you’re looking at an ascending triangle, how firm is the pre-existing bullish trend? Is it a high-velocity rally? Or has the stock price simply drifted higher at a slow pace, in a wide range? As a rule of thumb, stronger pre-existing trends will yield more successful triangle patterns.

Secondly, how volatile is the price action within the triangle pattern? Does the stock price meander between the support and resistance, only touching the top and bottom line a few times? Or does the price of the stock pinball back and forth off the trendlines with a high amount of momentum and precision? 

Velocity and volatility are key in determining the validity of short-term triangle patterns — patterns that occur intraday, over a series of days, or even a few weeks. In the case of long-term triangle set-ups — triangle patterns that form over the course of multiple months or even years — traders will want to see the price action test both trend lines as many times as possible within the pattern. While it’s still nice to find high volatility pinball price action in long-term triangle set-ups, those situations are exceedingly rare, and thus not necessary. What is necessary for confirming both short and long-term triangle patterns? The third and most important V:

Volume. When the stock price breaks out from the triangle pattern, it’s imperative that the market follows through in the form of higher-than-average trading volume. Whether you’re trading the triangles, just looking at price action, volume is a great way to measure the conviction of stock market movements. (Low-volume rallies in the broader market are often met with a high level of skepticism.) Low-volume trading represents the opposite of conviction: indecision. That’s why low volume trading within a triangle pattern is acceptable — horizontal patterns like triangles represent market indecision. It’s in the breakout — the resolve of that indecision — that traders need to see high volume in order to confirm the validity of the pattern.

As a bonus, when these triangle patterns occur on top of a pre-existing catalyst (like an earnings report), it often creates an explosive set-up for massive price movement. Let’s look at an example of this confluence of factors in real-time, in a high-volatility stock that reports earnings tonight: Crowdstrike (CRWD).

Symmetrical Triangle Pattern in Crowdstrike (CRWD) Ahead of Earnings Report

triangle patternSource: TradingView, Market Rebellion

Here’s a real-life example from Crowdstrike (CRWD), which reports earnings tonight (August 30th), after market close. Note the well-defined rally from the Covid-19 lows (around $32) all the way to the trend reversal at $298. In fact, if we zoom in, we can see a different type of technical pattern: the double top.

triangle pattern

Source: TradingView, Market Rebellion

Now that the long-term symmetrical triangle pattern in Crowdstrike is within striking distance of its apex, especially on the eve of an earnings report, amid high volatility in the market, it’s likely that Crowdstrike’s next move will be big — especially if the market can follow through with heavy volume (which throughout the formation of the triangle has been descending as investor indecision looms). Because this is a symmetrical triangle, it’s unclear which direction Crowdstrike is about to take — only that it’s likely to be a large move following the breakout or breakdown (which would serve as the entry point for a bullish or bearish trade, assuming the move is high-volume).

What to Know If You’re Going to Trade the Triangles (or Trade at All)

First thing’s first: there is no “law of the triangle”. While these patterns are popularly used by traders and algorithms to enter and exit positions, there is no guarantee in the stock market. So the best way to trade these technical patterns is not to all-in every triangle pattern you see. It’s to use these patterns, along with other conditions and metrics, to stack as much probability as possible in favor of your trade. 

Think about it like a poker player. Professional poker players don’t set out to win every single hand they play. Even if you put them against a novice, probability says that they’ll at least lose some hands. That’s why professional poker players want to play the long-game. Rather than jumping all-in at the first sight of a high-probability outcome, pros want to chip away at victory, opting for a higher volume of games. Professionals know that if they can consistently use probability to their advantage, then their odds of success will continue to grow as they continue to play more hands. The same is true of professional traders. 

Triangle patterns are great catalysts, but the recipe to becoming a successful trader is many great catalysts. That means consistently performing due diligence on every trade, and remembering that you don’t have to trade at all. If the set-up isn’t there: wait for one to appear. It’s better to wait for high conviction technical set-ups than it is to overtrade with your fingers crossed. Having trouble determining whether a triangle pattern is legit?

When in doubt, remember the three V’s:

    • Velocity: You want to see high-speed, single-direction price-action in a tight range prior to the formation of an ascending or descending triangle pattern.
    • Volatility: Price action within the triangle pattern should look like it’s trying to color in the shape — plenty of movement that touches (but stays inside) the lines.
    • Volume: When price breaks out of the triangle, it should be followed by a surge in trading volume — higher volume, higher conviction breakout.

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