Symmetrical Ascending and Descending Triangles

Triangles are the final 3-point chart pattern in this discussion. In symmetrical triangles, support and resistance lines merge. Symmetrical triangle tops have prices that trend up to the formation, whereas bottoms have prices leading down. To cite Bulkowski and his findings again, premature breakouts occur about 71 percent to 76 percent of the way to the triangle apex. A downsloping trend line drawn along the tops connects minor highs, while an upsloping trend line supports the minor lows. In Bulkowski's test runs, there are twice as many triangles with upward breakouts as with downward ones.

The Deutsche Telekom stock chart (Figure 4.43) shows a symmetrical triangle.

Figure 4.43 Deutsche Telekom chart from 07-01 to 04-02. Symmetrical triangle.

With this entry rule, we always wait for a breakout of the market. We check the price pattern for at least three peaks or valleys touched by the support or resistance line. The breakout has to occur right through either the support or the resistance line.

If we see a breakout to the downside (short entry), we place the stop-loss at the triangle high. If we see a breakout to the upside, we place the stop-loss at the triangle low.

Doubling the distance from highest high to lowest low of the symmetrical triangle once more facilitates the profit target rule. For the relevance of profit targets (on a rule that is similar to the one used here), Bulkowski reports a rate of 62 percent realized profit targets on downside breakouts and 81 percent realized profit targets on breakouts to the upside.

Finally, for trailing stops, we buy flat at the most recent peak in a profit (short positions) or sell flat at the most recent valley in a profit (long positions).

Descending triangles—in contrast to symmetrical triangles— have a horizontal trend (or support) line and a downsloping resistance line. Ascending triangles have a horizontal resistance line and an up-sloping trend (or support) line.

Triangles of the ascending or descending kind are easy to identify. Following Bulkowski, we find far fewer descending triangles than ascending ones. Almost two out of three (422 out of 689) triangles that Bulkowski identified were consolidations of the current trend. This means that if the price trend is downward going into the triangle, it is still moving downward after leaving it. Furthermore, almost three out of four ascending triangles show a meaningful rise after an upside breakout. Again, we call this sort of 3-point chart pattern a "continuation pattern."

Breakouts of the support or the resistance line forming the triangle are indications of valid market entries. In all cases, we wait for the occurrence of at least three peaks on the resistance line or three valleys on the support line.

The stop-loss point is marked by the support line on buy signals and by the resistance line on sell signals. As a rule of thumb, the line opposite to the direction of the market entry always marks the relevant stop-loss point.

Profit target rules and trailing stop rules are similar to the ones for symmetrical triangles. For the profitability of profit targets, Bulkowski reports 89 percent of ascending and 67 percent of descending triangles meet precalculated price targets.

The chart of the German major bank Commerzbank in Figure 4.44 shows the pattern of a descending triangle.

Figure 4.44 Commerzbank chart from 11-01 to 06-02. Descending triangle.

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