No doubt that forex traders are extensively using technical analysis tools to predict prices in order to make profitable bets. Understanding chart formations is necessary to succeed in currency trading. Among the most popular formations are the triangles and wedges.
Symmetrical Triangle Formations
Triangles can be broker into symmetrical, ascending, and descending kinds. Symmetrical triangles are formed by two converging lines, often resistance and support levels. Basically, it means the price volatility is narrowing to a single point.
If, subsequently, the price starts rising, it can indicate a trend upwards. A break above the resistance line is a bullish signal. When combined with other indicators, such as a shorter moving average going above its longer counterpart, a trading signal to buy is given.
Moreover, if the resistance line is flattening, it means that the breakout to the upside is more likely. However, no chart formation guarantees it will happen. Instead, it means the probability has increased. (Forex trading, as well as other types of trading, is a probability game.)
So that’s not to say that a forex trader must buy at that time, but rather it’s one of those times a trade should be considered.
A break below the support line is an indication that the trend is going down. As in the previous example, the trader should consider this signal together with other indicators. If the support line is falling, then the signal is even stronger.
Ascending Triangle Formations
While with the symmetrical triangle the prices can go either up or down, the ascending triangle is seen as a bullish signal. This triangle is formed when the resistance line flattens, and the support line rises. It means that while the currency price bounces off the top, its lows are subsequently higher. One the triangle reaches its apex, the likelihood of an upside breakout is increased.
Once the breakout occurs, some traders make a bullish bet, usually with other bullish indicators. A bullish indicator is not only a moving average rising (as mentioned above) but can be something else such as rising a MACD or RSI. Keep in mind that at times there are false breakouts and seemingly bullish trends don’t materialize.
Descending Triangle Formations
A descending triangle is the opposite of an ascending triangle. Here the resistance line falls (meaning the currency traders aren’t bidding as high as before), yet there’s a support on the downside, so the support line stays flat.
But, once the price of a currency starts falling below the support line, a bearish signal is generated. Some traders will then sell a currency. As in the previous examples, traders look for other confirmation signals.
There are two kinds of wedge formations: falling and rising. Wedges seem like triangles, but often are formed over longer periods of time and don’t converge as much at a single point. Wedges are between the channels and the triangles.
As with the triangles, the resistance and support lines are converging, but not as evenly as with the symmetrical triangles. One line is more slanted than the other.
Many amateur forex traders actually confuse the triangles with wedges. What’s more, they misinterpret the signals given by the wedge formations.
The bullish signal is given with a falling wedge. This wedge shows falling prices, lower support and resistance levels, but resistance has a sharper slope than support. This means that the price doesn’t rise as much as before, but it also falls at a descending rate. Effectively, the rate of selling weakens. Once the price in a falling wedge rises above the resistance line, a bullish signal occurs.
On the opposite side, there’s a rising wedge. To the confusion of many, it is a bearish signal. Here the resistance is less steep than the support line. This means the buyers aren’t able to raise the prices as much as before. It indicates a loss of momentum. Once a break above the resistance line happens, a sell signal is generated.
Many traders see triangles where there are no real triangle formations. Seeing a triangle based on 10 bars on a 5-minute chart is not a reliable signal. Traders should look at longer time frames. And, as mentioned above, many still confuse triangles and wedges.
Don’t make the same mistakes. Study the chart formations carefully and confirm with other technical indicators.