A symmetrical triangle pattern, also referred to as a wedge, is a consolidation phase before the asset price either breaks out to the upside or downside.
A breakout above the upper trend line of the wedge should herald a new bullish trend, while a breakdown below the lower line of the triangle points to the beginning of a new bearish trend.
Converging trend lines
The wedge shape is formed by two converging trendlines, indicating a narrowing of the peaks and troughs on a chart. In contrast to ascending or descending triangle formations, the upper and lower trendlines of the symmetrical triangle pattern are both pointing towards a central point.
As the symmetrical triangle is a consolidation period, we should observe declining trading volumes as the pattern progresses. Once the price breaks through one of the trendlines, there is scope for a sharp price move.
To give us some conviction that it is indeed a valid breakout, we should want the price action to be accompanied by higher trading volume.
A wedge shape can be pointing downwards, upwards or just horizontally. When a wedge is pointing downwards or upwards, the breakout tends to come in the opposite direction to where the wedge is pointed.
So, in the case of a falling wedge, a breakout to the upside on higher trading volume represents a buying opportunity as a new bullish trend gets underway. We could place a long trade at a price marginally above the upper trendline at the pointed end of the wedge.
In the case of a wedge pointing horizontally, we are looking for a breakout to either the upside or downside.
Trading the triangle
As an example, suppose we are tracking the price of silver. At the beginning of the symmetrical triangle formation sliver falls from $17.4 per ounce to $15.2 per ounce. The peaks and troughs of the triangle then begin to converge, with the next upper price point on the downward sloping line across the top of the triangle at $17.2.
On the lower, upward sloping line of the triangle, the next price trough intersecting the line is at $16. On the upper line, the next price peak is at $17.1, while on the bottom line we next view the price intersect the upward slope at $16.4.
We suddenly see the price breakout above the upper trend line, hitting $17.3. Having initiated a buy at $17.3, we are pleased to see the price moves up sharply again and we close out the position at the end of the trading day when the price is at $19.
The usual way to set a price target for a breakout trade on the symmetrical triangle is to apply the height of the triangle to the breakout point. So, in this case, a guide to a plausible price target would be $2.2 ($17.4− $15.2) + $17.1 = $19.3.
As always, we should seek to set a stop-loss order for the trade, just in case there is a retrace and it proves to be a false breakout. In this example, $16.4 could be a reasonable level at which to set a stop-loss order as this was the last point on the upwardly sloping trendline at the bottom of the triangle.