What Is a Symmetrical Triangle Pattern? Definition and Trading

A symmetrical triangle also known as a coil is a chart pattern characterized by two converging trend lines connecting a series of sequential peaks and troughs. These trend lines should converge with opposite slopes, forming a narrowing pattern that resembles a triangle. Trend lines that converge at slopes that aren't fully opposite are called the rising wedge, falling wedge, ascending triangle, or descending triangle.

Symmetrical triangles represent a pause in the prevailing trend as bulls and bears reach an equilibrium. However, once the price breaks out decisively from the triangle, it often signals the start of a new trend or continuation of the prior trend. The direction of the breakout, whether above the upper trend line or below the lower trend line, tells you which side has gained the upper hand. Traders and analysts closely watch symmetrical triangle patterns for trading prospects based on the expected breakout direction and volume of trades. Technical analysis using this chart pattern should confirm its validity with additional indicators.

Symmetrical Triangles Explained

A symmetrical triangle chart pattern is a period of consolidation before the price is forced to break out or down. A breakdown from the lower trend line marks the start of a new bearish trend, while a breakout from the upper trend line indicates the beginning of a new bullish trend.

The price target for a breakout or breakdown from a symmetrical triangle is equal to the distance from the high and low of the earliest part of the pattern applied to the breakout price point. For example, a symmetrical triangle pattern might start at a low of $10 and increase to $15 before the price range narrows over time. A breakout from $12 would imply a price target of $17 ($15 minus $10 equals $5, then plus $12 equals $17).

The stop-loss for the symmetrical triangle pattern is often put right below the breakout point. For example, if the security breaks out from $12 with high trading volume, traders will frequently place a stop-loss just below $12.

Symmetrical triangles differ from ascending and descending triangles in that the upper and lower trend lines slope toward a center point. In contrast, ascending triangles have a horizontal upper trend line, predicting a potential breakout higher, and descending triangles have a horizontal lower trend line, predicting a potential breakdown lower.

Symmetrical triangles are like pennants and flags since these chart patterns can signal a continuation in price trends. However, flags and pennants require a sudden shift before they form. Symmetrical triangles can take shape without such a prior movement. Below are some differences between them.

As with most technical analyses, symmetrical triangle patterns work best with other indicators and chart patterns. Traders often look for a high-volume move to confirm a breakout and may use different technical indicators to determine how long the breakout might last. For example, the relative strength index (RSI) may be used to determine when a security has become overbought following a breakout.

Identifying a Symmetrical Triangle

Six components can help identify a symmetrical triangle chart pattern: converging trend lines, volume, duration, the breakout point, the price target, and market sentiment.

Traders should first look for two converging trend lines, one ascending and the other descending. The upper trend line connects lower highs, while the lower trend line connects higher lows. The convergence of these trend lines indicates that buyers and sellers are unsure of the market's direction, producing a consolidation phase.

In addition, volume tends to decrease as the pattern develops, reflecting the market's indecision. A noticeable drop in trading volume can be a crucial indicator of a symmetrical triangle formation. When the breakout occurs, there should be a significant increase in volume, confirming the pattern's validity and the new direction of the price movement.

Regarding duration, symmetrical triangles can form over various time frames, from weeks to months. The longer the pattern develops, the more significant the resulting breakout is expected to be. The symmetrical triangle chart pattern ends when the price breaks out of the converging trend lines. This breakout is a critical indicator of the future price direction. The breakout can occur in either direction, upward or downward.

Once a breakout occurs, traders can estimate the price target by measuring the widest part of the triangle and projecting that distance from the breakout point. This measurement forecasts how far the price might move following the breakout.

Finally, while the symmetrical triangle does not indicate the direction of the breakout, it reflects a period of equilibrium between supply and demand. Traders and analysts often interpret the direction of the breakout as the direction in which the market sentiment has shifted. Identifying a symmetrical triangle requires patience and practice since the pattern develops over time. Traders and analysts should watch for these formations closely, as they can precede significant price moves.

A Trading Strategy for a Symmetrical Triangle Chart Pattern

Trading strategies based on symmetrical triangle patterns focus on identifying consolidation periods followed by a significant breakout, which signals the next likely price movement. While the pattern marks a continuation, it can break out in either direction. Thus, once one is identified, careful planning and confirmation are required to execute trades successfully.

First, identify the chart pattern by spotting the converging trend lines, with one ascending and the other descending. The pattern should have at least two lower highs and two higher lows touching the trend lines.

Patience is key. Traders should wait for the price to break out of the triangle pattern convincingly; the price should close outside the trend lines. Looking at the volume is critical to confirm breakouts since they are accompanied by a significant increase, which signals the strength behind the price movement. A breakout without a notable change in volume is less reliable.

Once a breakout is confirmed with volume, traders should enter a trade in the breakout's direction. Some traders may wait for a minor retracement toward the trend line, which would now act as support or resistance, as a more conservative entry point.

Experienced traders put stop-loss orders just outside the opposite trend line of the breakout to minimize losses should the market move against the trade. The projected movement after a breakout can be estimated by measuring the triangle's height and then projecting that distance from the breakout point.

Dealing with False Breakouts

As with any financial theory, there are risks. False breakouts are common in symmetrical triangle patterns. They occur when the price breaks out of the triangle but then quickly reverses in opposite direction.

Traders should look for confirmation with volume indicators or a retest of the trend line before considering the breakout valid. They should also set stop-loss orders just outside the trend line to protect against large losses from false breakouts.

Traders may consider additional technical analysis indicators for further confirmation. Some indicators include moving average crossovers or momentum indicators such as the RSI or moving average convergence divergence.

Real World Example of a Symmetrical Triangle

The following chart shows a symmetrical triangle pattern in the trading of Northwest Bancshares (NWBI):

In this example, the symmetrical triangle suggests the stock is consolidating before a breakout. The expected price move after the breakout equals the triangle's height. This number is added to the breakout point for an upward breakout or subtracted for a downward breakout. Assuming an upward breakout at $17.20, the price target would be $19.40 ($17.20, the breakout level, plus $2.20, the triangle's height).

The stop-loss for an upward breakout should be set slightly below the breakout point to protect against false breakouts or a reversal in price direction. In this example, a stop loss at $16.40 provides a safety net, ensuring that the trade is exited if the price falls back below this level.

For a downward trend breakout or a breakdown, the stop loss is put slightly above the most recent resistance or the breakdown point to minimize potential losses if the price reverses direction. The $17.20 stop loss should be chosen to limit losses on the downside, offering a buffer against minor retracements that do not offset the overall pattern.

The Bottom Line

The symmetrical triangle pattern is a chart formed in technical analysis. It's characterized by converging trend lines connecting a series of sequentially lower peaks and higher troughs, indicating a period of consolidation and equilibrium between buyers and sellers.

This generally neutral pattern suggests a breakout can occur in either direction. Therefore, it is crucial for traders to wait for a decisive breakout, confirmed by increased volume, before initiating trades. Trading strategies centered around symmetrical triangles emphasize the importance of confirmation and risk management, with calculated entry points, stop loss orders, and price targets based on the dimensions of the triangle.