Introduction to the Symmetrical Triangle Pattern
Whether I’m looking at a small trading time frame like a 5-minute chart, or a larger time frame like a 4 hour or daily chart, when I see my favorite price action pattern forming I get very excited. I love this pattern because it has great risk versus reward potential and because understanding price action trading setups can be extremely beneficial to your trading skills. After some practice, this pattern will become easy to spot on a chart because of its symmetrical structure.
In this article, I will cover exactly how I like to mark up my charts when this pattern is forming, how I “measure” this pattern to make sure that I am indeed dealing with such a corrective pattern, its symmetrical characteristics, and how to trade it correctly.
I will provide many examples, as well as recent formations on various time frames. It is my hope that, at the end of this article, you will be able to spot this pattern for yourself and trade it correctly.
Corrective Price Patterns
My trading methodology, in a few short words, is pretty simple: Join the larger trend by entering a position, or adding to an existing position, at the end of counter trend corrective patterns.
That is, of course, easier said than done. It is always advisable to trade with the trend. You may have heard the saying, “the trend is your friend”, most educators will tell you that and although it is true, the majority of traders attempting to enter with the main trend still end up losing over and over again. Although trading with the trend makes the world of sense, HOW and WHERE do you actually join the trend while at the same time controlling your risk?
Trends do not move in straight lines up or down; they move in waves or ‘Zig Zag’ type formations. Because of this wave like structure, any wave that moves in the direction of the main trend is considered to be a “motive wave” or “impulsive wave”. Any wave that is counter trend is considered a “counter trend wave” or “corrective wave”. Below I have added a chart that illustrates this.
In the chart example above of the ES Futures Index (e-mini S&P) dating back to around the 16th June 2017, we can clearly see that the trend is up and moves in a series of waves, but HOW and WHERE would you have entered this market if you decided to open a long position during the “Complex Corrective Wave” marked by a black box? Look at the overlapping waves marked by blue lines.
It would nearly have been impossible without being stopped out of your position multiple times! I bet you a lot of traders lost a lot of money during that period that lasted more than a month. If you were not long already, months prior to this corrective phase then entering during this phase could have cost you dearly.
Being right about the direction of the market does not mean you are going to make money!
I honestly believe that timing is everything in trading. To time an entry correctly, one needs a way to join the overall trend with the least risk possible; and to do that, one needs a way to define or identify which corrective pattern may currently be forming on your chart.
The purpose of this article today is to teach you how to time your entries within a trend and make high-probability trade decisions while keeping your risk small, over and over again.
It is because of these corrective waves or phases that I like trading. While most traders lose their money during such times, my strategy allows me to wait patiently and trade the ends of these patterns, providing fantastic trade opportunities. Luckily for us, the markets like repeating various different corrective patterns and they will continuously appear over and over again. It’s almost like human behavior, repeatable and predictable.
Elliott Wave Theory
The mere mention of Elliott Wave theory (EWT) may have some traders running for the hills! I say this because Elliott Wave theory can be a difficult subject to master and it works particularly well in hindsight, BUT today I will show you a way that combines simple elements of Elliott Wave theory with Price Action without the need to be an EWT expert.
Following my simple step by step guide you will not need any additional knowledge about EWT, other than what is mentioned here, to benefit from my strategy.
The corrective wave that I particularly like trading has all the traits of a high-probability and risk defined price pattern that can (with practice) be anticipated in real-time while it’s forming. This pattern is called the “Symmetrical Triangle Correction”.
Part 1: Introduction to the Symmetrical Triangle Correction
In Part 1 of this article I will briefly introduce you to the symmetrical triangle correction, what it looks like, how it is labeled and when and where to enter a position correctly.
In Part 2 I will give you step by step instructions of how to label and trade the symmetrical triangle pattern correctly using a “real life” example.
In Figures 1 and 1.1 below, I have added “picture perfect” drawings of this symmetrical triangle shape pattern in an up trending and down trending market. I say “picture perfect” since the market will very rarely give you such a clean cut correction to work with, but you will never the less be able to spot them forming rather easily. These symmetrical triangular corrections can also be at angles, either ascending or descending, but we will only focus on the horizontal triangle correction for now.
Figure 1 – Ascending Triangle chart pattern in an up trending market (bullish triangle)
Labeling the Symmetrical Triangle
Here I want you to focus on the shape of these corrections, as shown above, and how they are correctly labeled. The shape of these corrections are self-explanatory. They are triangles (orange lines) and these triangles behave in a certain way that are symmetrical (red labeling).
The formation of this symmetrical triangle pattern consists of 5 waves labeled A-B-C-D-E, and these five waves in turn sub-divide in smaller waves of 3 each, labeled a-b-c. For now it’s only important to know how to define them by their labeling. I will go into a real life example later on showing you step by step how to label this type of pattern and discuss entry and exit parameters.
Tip: Try to open any chart of your favorite market and scroll back in time and try to spot these patterns. They will appear in any time frame. Once spotted try to mark them out on your chart and label them as shown above.
Entry and Stop Loss Placement for the Symmetrical Triangle Pattern
Again, the previous diagrams are “picture perfect” examples, however, it provides us with a great opportunity to TIME the end of the correction. Timing the end of the correction allows us to enter the market at the right time with defined risk.
Below I have added a diagram of a symmetrical triangle in a down trending market. It shows where my entry and stop loss orders would need to be, giving me the ability to know this beforehand. I therefore have time to plan my trade and then trade my plan. It is a crucial part of my strategy because if you do not have an exact plan you are setting yourself up for failure!
Using a real life example later on in this article, I will explain exactly how I anticipated a symmetrical triangle forming but before that we need to know the correct placement of an entry and stop loss order.
- Entry Order
Once I have waves A, B, C and D confirmed, I get ready and anticipate wave E. Wave E will generally terminate at or near the upper orange trend line as in our example. I would then wait for a reversal type candle stick (explained in real life example later) and place a Sell Order one tick below that candle to enter a position short.
- Stop Loss Order
When my entry order has been triggered I immediately place a stop loss order to limit my risk, in case the trade does not go in my favor. I would place that stop loss order one to two ticks above what we now consider as the completion of wave E.
- Target Order
As soon as my Stop Loss order has been placed I move on to determine my potential target. I generally like to at least aim for a target that is 2 to 3 times larger than my potential loss.
Part 2: Step by Step Procedure of the Symmetrical Triangle Using a Real Example
I can typically spot or anticipate a Symmetrical Triangle forming as soon as wave C has ended and wave D gets underway.
In the chart below, I have added a recent “real life” example of a triangle correction in CL (Crude Oil Futures). I will provide additional screenshots, with commentary showing you how I anticipate the possibility of a triangle and how to “measure” its characteristics.
Crude Oil Futures 5min Chart
Step 1: The example above shows CL on a 5-minute chart. The first green arrow on the left shows that CL was trending up. We then suddenly see a drop that can sub divide into 3 waves, labeled a-b-c in white. At this stage there was no knowing that we could be dealing with a symmetrical triangle and, per our example, we would not be able to label the first drop as A (in red) either. We need further evidence.
The market then strongly moves up again. I purposefully chose this example to demonstrate that it is not a “picture perfect” triangle correction.
Side Note: Crude Oil is a very volatile market and if you ever want to trade this particular correction then know that in a “picture perfect” example like in figure 1 and 1.1, Wave B does not go higher or lower than the previous high or low that preceded it, but here it does!
Is it now not a triangle because of that? Some traders who trade these sort of corrections may suggest its invalidation as a triangle correction, but in my opinion they could be missing a huge opportunity. Due to volatility, I will consider the pattern still valid since price never closed above the previous high. Notice the “rejection” wicks around the previous high. When price got rejected and moved sharply lower again at the previous level it strengthened my beliefs that the longer price stays in this corrective mode, the more “energy” it is building up that may result in an explosive continuation of the current trend later on. This is exactly what we want as traders.
Step 2: After this rejection, price action moved down and for the first time I went ahead and labelled the previous drop as wave A, and the rejection area near the previous highs as wave B. At this stage the market was providing me with clues that we are dealing with some sort of corrective pattern.
Step 3: On the chart below, after labeling wave B, price continued lower in an a-b-c pattern. Still having no clue as to what type of correction we were dealing with, I ran a Fibonacci Retracement from the end of wave A to the high of wave B (Click here to learn how to use Fibonacci retracement). When price respected the 61.8% Fibonacci level (market with yellow arrow) and moved up again, I knew for the first time that this has the potential of tracing out a triangle, since the price at the end of wave C never took out the low at A and moved up again.
You will see these Fibonacci levels respected all the time in a triangle, especially the 61.8% and 78.6% levels. This is what I meant with how I “measure” this pattern during the introduction. When these levels are respected they provide clues as to what correction you could be dealing with.
Step 4: On the next chart below after price respected the 61.8% Fibonacci level and I marked it as C, I proceeded to draw a trend line (orange), connecting A and the higher low C. I immediately went and drew another Fibonacci retracement from the end of wave B to the end of wave C. Guess where price reversed from? That’s right, the 78.6% Fibonacci retracement level! After that happened I labelled it D. The orange trend line I drew in connecting point A and C can now be considered a line in the sand for this potential triangle to be valid. A future reversal from this line is what we are looking for.
Step 5: On my chart below as price action moved down from the end of wave D, I was now convinced that we only needed wave E to form and find an entry, trading long with the trend. At this stage I drew in another orange trend line connecting B and D. I now have my triangle and a break above this orange line will confirm the end of this correction.
The market moves down slowly in an a-b-c formation. Again I make use of a Fibonacci retracement connecting wave C to D. Price respected the 50% Fibonacci retracement level previously at small wave a (in white) but I normally like to see a potential wave E touch, or get very close to my bottom orange trend line.
Wave E will typically terminate at a lower Fibonacci level than the previous waves did, so be aware of this.
Please note: During the entire formation, I sat on my hands and waited patiently. I also had enough time to get ready for my trade entry once wave D was in. More than 1 hour and 40 minutes passed between wave D and E, allowing ample of time to plan my trade. Next I will cover trade entry and management.
Symmetrical Triangle Trade Entry and Management
When trading these corrections, it is always wise to wait for some sort of confirmation to validate a trade entry. Waiting for such a validation signal can be the difference between a loss or a gain in your account and is therefore very important. At that crucial point where you make your final trading decision prior to an entry (in our case point E), we definitely want to see price behave to our expectations. These expectations come in the form of reversal candles, giving us added confirmation that everything is running according to plan and that the triangle pattern is being respected.
Step 6: Confirmation
In the chart above, after my lower orange trend line was touched AND the 50% Fibonacci level was respected, I immediately got such an confirmation in the form of a reversal candle i.e. price moved down a bit then reversed, closing higher off its lows.
A reversal candle will typically take out the low of a previous candle but will not close lower, but instead higher off its lows. See Image below
That confirmed that I now wanted to get long.
Step 7: Entry and Stop Loss Order
Going back to my labeled symmetrical triangle chart. The reversal bar had a high of 46.47, and I placed a buy order one tick above that high at 46.48.
Since a trader must always place a stop loss order, the best place to do so would be one to two ticks below E. In this case, my stop was at 46.33, after I got filled long at 46.48 thus risking 15 ticks per contract.
Step 8: Target Order:
Once I was filled and protected my trade with a stop loss order I placed my target order at the recent high at 46.74, therefore having the potential to make 26 ticks.
Please Note: An entire book can be written on trade management and so forth. This trade only had a risk versus reward ratio of 1.73, excluding commissions. Generally, I like to see a risk versus reward ratio of at least 2.5, however, I trade multiple contracts. My second target was higher at a risk versus reward ratio of 2.5, BUT I closed my entire position as the market was approaching the close of session on Friday the 14th July 2017. I did not wish to hold positions into the weekend. I am fine with a risk reward ratio of less than 2.5, as this is such a high probability setup.
How price unfolded:
In the chart above, one can see that CL moved up 40 ticks (as per time of writing), giving us a 2.6 risk versus reward ratio. If you held a position over the weekend, then the first target would have been hit. Your stop loss order should have been at break-even after the first target. Note that the break-even stop loss would have almost been hit, but was not. Holding my positions over the weekend is something that I never do. Not being in the market is also a form of risk management.
For the more experienced trader, or for anyone who is interested in Market Geometry, then adding another “level” of technical analysis, such as Market Geometry, can add extra confirmation when making trading decisions.
In the figure above, adding a trend channel by connecting the start of wave A with the end of wave B and extending the width of the channel to point A, one also finds additional confirmation that wave E ended almost exactly on the middle line of the channel (marked with a yellow arrow). Market Geometry is just another added confirmation to my analysis; and perhaps a subject worth investigating in the future for my current readers.
It is my hope that the information I have provided you about my favorite Price Action Pattern, the Symmetrical Triangle Corrective Pattern, has both been interesting and informative. A great place to start, should you decide to trade this pattern, would be to filter through your charts of your favorite markets and search for these patterns, marking them out with correct labeling. Look at different time frames as well and soon the Symmetrical Triangles will become easy to spot!