John L. Person - Forex Conquered. High Probability Systems and Strategies for Active Traders, Wiley
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Traditional Forex Chart Patterns
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There are three main types of triangle patterns, as shown in Figures 4.4, 4.7, and 4.8 which are symmetrical, ascending, and descending, respectively. A fourth type, known as a pennant formation, resembles the symmetrical tri angle—it has two equal sides—as shown in Figure 4.5. The ascending tri angles indicate an upward bias, and the descending triangles indicate a downward bias. They are used as a measuring guide for continuation price moves. The length of time, being the distance the “triangle” or congestion area takes to form, is believed to be the distance the market will move once the market “breaks out” of the triangle pattern.

1. Symmetrical triangles are considered consolidation patterns that occur within a trending phase. The symmetrical triangle develops when prices consolidate as the trading range narrows; the shape forms as prices compress in a coiling pattern. The highs are lower and the lows are higher, as shown in Figure 4.5. As with any time you draw a trend, you need two points of interest, such as two consecutive highs or lows. When drawing out the trend for the triangle, we look for at least four to six points of interest. The true test on determining whether a triangle has formed is that prices do not come to test the apex of the triangle. In fact, the reliability of this pattern depends on the fact that the consolidation period in price only reaches three-quarters of the distance to the apex. This pattern is considered a neutral indication, which re quires one to watch and wait for a breakout. In order to determine the direction of the breakout, I like to look for a two-period close above the upper resistance trend line. The opposite is true for a breakdown.

2. Pennant formations have the same characteristics as the flag in the sense that they represent a price consolidation after a sharp rally. As Figures 4.5 and 4.6 show, the shape resembles a symmetrical triangle, and the measuring technique is similar to that used with the flag. The difference in the shape of the pennant's consolidation is obvious com pared to the flag. The difference is that pennants take less time to form—generally one week or 10 periods—and lean toward the direc tion of the price move. In order to use this formation as a measuring tool, we take the distance from the base of where prices started (point

A) to the peak or top of the extended move (point B), as shown in Fig ure 4.6. Consider this consolidation as the midpoint of the overall move, which would give a targeted price projection that would mark point C as the objective for the price move.

3. Ascending triangles are similar in nature to symmetrical triangles but have a slight twist in how to use them for price measurement tech niques. The bottom trend line slopes up, as shown in Figure 4.7, giving us the clue that the breakout will be to the upside. We can take the widest part of the difference between the upper trend line and the lower trend line and use that amount to gauge how far prices may ex tend once we see a definitive move.

4. Descending triangles are the opposite of ascending triangles. The re sistance line slopes down, as shown in Figure 4.8. What I do to help de termine the true breakout is to watch for a two-period close below the horizontal support line. If you use this pattern to enter a trade, you can

use a stop above the resistance line that slopes downward. Measuring the greatest distance from the beginning point of the descending trend line to the bottom of the support line will give you the price measure ment; we should see a breakdown in price occur to help determine a profit objective.

Let's examine the euro currency chart in Figure 4.9. The symmetrical triangle is a neutral pattern, meaning it does not give a solid clue as to the direction of the breakout. We want to watch for what I call the singleclose trap, which is what occurs when we see a false breakout on one side for a single period and then an immediate reversal. What you want to focus in on is a sustained price move as prices close at least twice outside the trend lines.

Here is how the measuring technique can help you: Take the widest dis tance between point A and point B, and then extend that down from the break at the apex of the triangle. That measurement will give you your initial price objective.


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