Novice Traders' Notebook  |  JAN 1999

Triangles: Reversal Or Continuation by Stuart Evens

Triangles: Reversal Or Continuation by Stuart Evens Look at most any book on the subject of technical analysis, and you’ll come across triangles. These formations are usually one of the first chart patterns that novice technicians study, and it deserves some examination. Triangles are classified as reversal patterns in some reference works, while they are described as continuation patterns in others. Robert Edwards and John Magee, in their Technical Analysis Of Stock Trends, have a chapter titled “Important Reversal Patterns — The Triangles.” John Murphy, on the other hand, in his Technical Analysis Of The Futures Markets, has triangles as a subheading under the chapter titled “Continuation Patterns.” On reading these chapters on triangles, however, we find that both works instruct the reader about triangles behaving as both reversal and continuation patterns. What is common to both discussions, and in fact most discussions on triangles, is that once triangles are properly identified, subsequent price action tends to react in predictable ways. What technicians have found over the years is that after prices break out of the triangle pattern, it is highly probable that prices will continue moving in that direction. Knowing this gives us the opportunity to trade in that direction, and to profit if we are correct. Let’s take a look at the different types of triangles, how they are formed, what they look like, and how to draw them on the price chart. Then we’ll examine the subsequent behavior of the stock used as an example after prices break out of the formation. Finally, we’ll see how we can use the triangle to make trades based on our interpretation of the chart; profitable trades, if our assessment of the pattern is correct.

by Stuart Evens