Symmetrical Triangle Trading Strategy Analysis (Backtest And Example)
If you are a price action trader, chart patterns, such as the symmetrical triangle, could be one of the best tricks in your toolbox. The pattern forms in all timeframes and can be used for any style of trading. However, to trade this pattern successfully, you need a symmetrical triangle trading strategy. What is it?
The symmetrical triangle trading strategy is a method of trading that uses the symmetrical triangle pattern to identify trading opportunities. The symmetrical triangle is a triangle-shaped chart pattern that is formed by a series of descending swing highs and ascending swing lows, giving the structure a down-sloping upper boundary and an up-sloping lower boundary. It is considered a continuation chart pattern, which means that when it forms, the price is likely to continue in the trend direction.
What is a symmetrical triangle trading strategy?
The symmetrical triangle trading strategy is a method of trading that uses the symmetrical triangle pattern to identify trading opportunities. The symmetrical triangle is a triangle-shaped chart pattern that is formed by a series of descending swing highs and ascending swing lows, giving the structure a down-sloping upper boundary and an up-sloping lower boundary.
It is considered a continuation chart pattern, which means that when it forms, the price is likely to break out in the direction of the trend to continue trending in that direction.
What is a symmetrical triangle and how is it formed in the market?
The symmetrical triangle chart pattern is a triangle-shaped price structure in which the price swing highs are continually descending while the swing lows consecutively end higher, thereby giving the structure a down-sloping top boundary and a rising lower boundary.
This triangle pattern is formed as gradually ascending support lines and descending resistance lines meet up as the asset’s trading range becomes increasingly smaller. Usually, the asset’s price will bounce back and forth between the two trendlines, moving toward the apex of the triangle, until it eventually breaks out in one direction or the other.
How can traders use the symmetrical triangle pattern to make informed trading decisions?
Traders and market analysts generally regard symmetrical triangles as consolidation patterns, which means that the market is taking a breather in anticipation of either the continuation or reversal of the current trend. On many occasions, it ends up as a continuation chart pattern — which means that when it forms, the price is likely to break out in the direction of the current trend and continue trending in that direction.
However, in some situations, the price will break out in the opposite direction of the trend, leading to a trend reversal. That is, if a symmetrical triangle follows a bullish trend, there is a breakout below the ascending support line, which would indicate a market reversal to a downtrend. Conversely, a symmetrical triangle following a sustained bearish trend ends with an upside breakout, indicating a bullish market reversal.
What are the key characteristics of a symmetrical triangle pattern and how can they be used to identify potential trades?
The symmetrical triangle has a characteristic symmetrical shape formed by an ascending support line (lower boundary) and a descending resistance line (upper boundary). These lines are drawn by connecting the swing highs on the upside and connecting the swing lows on the downside.
With a descending upper line, it means that the swing highs consecutively got lower. Likewise, ascending lower line means that the swing lows consecutively got higher. So, you have a symmetrically triangular structure with its base on the left and its apex on the right.
How do traders determine the potential direction and extent of a breakout from a symmetrical triangle pattern?
The symmetrical triangle forms after the price have been trending in a particular direction, which could be up or down. Most of the time, the breakout would be in the direction of the trend where it forms. That is, if there has been a bullish trend, the breakout is likely in the upward direction, and if the trend has been bearish, the breakout will likely occur to the downside.
Sometimes, there can be false breakouts. Interestingly, you can use the false breakouts to support your prediction of the likely direction of the true breakout: the real breakout is more likely to be at the opposite side of the false breakout, especially if that also agrees with the trend direction.
What are some common mistakes to avoid when trading the symmetrical triangle pattern?
The first mistake is to place a stop order above the upper boundary (resistance line) or below the lower boundary (support line) of the triangle. It is possible for the price to spike through the resistance or support line without achieving a breakout. By definition, a breakout occurs only when the price has closed beyond any of the boundaries on the timeframe you are monitoring. So, a stop order can get you into a trade when there has not been a breakout.
Another mistake is chasing the trade when the price breaks out with a big candlestick. In such a situation, entering a trade would mess with your stop loss level. It is best to wait for the price to retest the breakout level, which happens quite a lot but not all the time.
How can traders manage risk and protect their capital when using the symmetrical triangle strategy?
First, they should trade with a fraction of their account balance. Position sizing is the primary way to manage risk in trading, not the use of a stop loss. Experts advise the use of the 1% rule, which means risking only 1% or less of your account balance in one trade, and the primary way to achieve that is to trade a small position size.
Another risk management approach is the use of a stop loss. This can only be effective when you manage your position size such that a wide stop loss can keep you at an acceptable account risk level. If you trade a huge position and want to keep your account risk to 1% of your account, you will be forced to use a tight stop loss, which would get you stopped out by the normal price gyrations before the price could even move in your direction.
What are some key considerations for setting stop-loss and take-profit orders when trading the symmetrical triangle pattern?
Based on the triangle chart pattern, your stop loss should be set beyond the other boundary of the triangle. But if you are the aggressive type and want to use a tighter stop loss, may set it midway between the upper and lower boundary of the triangle — it is more likely to get hit by price gyrations.
The take-profit level is measured from the triangle base. That is, you project the size of the base of the triangle from the point of the breakout to get the profit target.
How can traders use other technical analysis tools and indicators in conjunction with the symmetrical triangle strategy to improve their trade accuracy?
The symmetrical triangle chart pattern is a price action pattern, so it is mostly traded by price action traders who don’t really like to see a bunch of indicators on their charts. The most common tools price action traders use are trendlines and horizontal lines — to indicate support and resistance levels.
Nonetheless, if you want to add an indicator when trading the symmetrical triangle pattern, a common one to use is the moving average, which would help you see the direction of the trend and how strong it is. You may also add a momentum indicator like the MACD to confirm the momentum of the breakouts.
What are some examples of successful trades using the symmetrical triangle strategy?
Symmetrical triangle breakouts tend to be successful if you catch the real ones. Below are a few chart examples of successful breakouts. The first chart is that of the Northwest Bancshares stock trading on the Nasdaq exchange. Notice how the price rose steadily after the breakout to the upside.
The next chart is that of a currency pair, USDJPY. From the chart, you can see that the price was trending upward before the symmetrical triangle formed, and the breakout happened in the upward direction. Note the measured profit target.
How can traders continually improve their understanding and application of the symmetrical triangle strategy?
The only way for traders to improve their understanding and application of the symmetrical triangle strategy is by continually studying the markets and looking for the chart pattern. By identifying the pattern and seeing how the market plays out after it forms, the trader can get an idea of its win ratio and also get to learn the best way to trade it — when to enter a trade, the best place to place a stop loss, and how to take profits.
The psychology behind symmetrical triangles
The symmetrical triangle represents a period of consolidation in the market. It follows a trend, so it represents a time when some market participants are booking profits while others are either accumulating positions or adding to their already existing position.
It indicates the actions of the buyers and sellers — buyers are eager to buy on any price decline, leading to higher swing lows (an ascending support line), while sellers are eager to sell on any swing up, causing lower swing highs (a descending resistance line). As the two lines get closer and closer together, it’s evident that something will have to give.
Using support and resistance levels in symmetrical triangle trades
Unlike the ascending and descending triangles, which have a static horizontal support or resistance level as one of the boundaries, the symmetric triangle doesn’t have a horizontal boundary. Instead, the upper boundary, which acts as the resistance level, slopes downward dues to the descending pattern of the swing highs. Conversely, the lower boundary, which acts as the support line, slopes upward because of the ascending pattern of the swing lows that formed it.
Setting stop losses and taking profits with symmetrical triangles
You set your stop loss and profit target using the structure of the pattern. Set your stop loss beyond the other boundary of the triangle. If you are the aggressive type and want to use a tighter stop loss, may set it midway between the upper and lower boundary of the triangle, but it is more likely to get hit by price gyrations.
You measure your profit target from the base of the triangle and project it from the point of the breakout to get the profit target.
Examples of successful symmetrical triangle trades
Here are some examples of successful symmetrical triangle trades:
From the chart of the USDJPY currency pair above, you can see that the price was trending upward before the symmetrical triangle formed, and the breakout happened in the upward direction. Note the measured profit target.
The chart below is that of the Northwest Bancshares stock trading on the Nasdaq exchange. A symmetrical triangle formed as you can see from the yellow trendlines marking the upper and lower boundaries. Notice how the price rose steadily after the breakout to the upside.
Incorporating other technical indicators in symmetrical triangle strategies
The symmetrical triangle is mostly traded by price action traders who don’t really like to see a bunch of indicators on their charts. The most common tools price action traders use are trendlines and horizontal lines to indicate support and resistance levels.
However, some traders may add an indicator to the chart. A common one to use is the moving average, which would help you see the direction of the trend and how strong it is. You may also add a momentum indicator like the MACD to confirm the momentum of the breakouts, as you saw in the chart above.
Applying symmetrical triangle patterns to different timeframes and markets
The symmetrical triangle can form on any timeframe and should be traded accordingly. If the pattern forms on the 1-minute chart, you may trade it as a scalping strategy. On the other hand, if the pattern forms on the daily timeframe, you can trade it as a swing trade. If it forms on the hourly chart, it can make a good day trade.
Symmetrical Triangle Trading Strategy backtest
A backtest of a symmetrical triangle strategy requires strict trading rules and settings. Because it’s a complicated pattern to put down into 100% quantifiable rules, we rely on already published stuff.
Instead of a quantified backtest with defined trading rules, we rely on data from Thomas Bulkowski’s book from the late 90s called The Encyclopedia of Chart Patterns. His book is not based on strict quantified rules or data-driven backtests, but instead on visual confirmation. Nevertheless, we believe his findings are a decent approximation of the usefulness of the symmetrical triangle.
Bulkowski, an engineer, sat down and went through technical formations for 500 stocks over five years. This gave a total database of 2 500 years, although there are sources of error as all the stocks are from the same time period. In total, he registered over 15 000 technical formations.
Bulkowski divided the symmetrical triangle into a symmetrical bottom triangle and a symmetrical top pattern.
Symmetrical triangle bottoms pattern strategy backtest
On pages 545-559, Bulkowski wrote about his findings. It’s pretty detailed, but we believe we can summarize the significant findings into this simple table:
| Description | Symmetrical triangle bottoms breakout (upside) | Symmetrical triangle bottoms breakout (downside) |
| #Formations among 500 stocks from 1991 to 1996 | 63 | 83 |
| Reversal or consolidation | 63 reversals | 83 consolidations |
| #False signals | 2 (3%) | 2 (2%) |
| Average rise/decline of successful formations | 41% | 19% |
| Average decline/rise of failed formations | 20% | 10% |
| #Formations that reached the price target | 48 (79)% | 46 (57%) |
| The average length of the formation | 2 months (55 days) | 2 months (53 days) |
Symmetrical triangle tops pattern strategy backtest
On pages 560-575, Bulkowski wrote about his findings. It’s pretty detailed, but we believe we can summarize the significant findings into this simple table:
| Description | Symmetrical triangle tops breakout (upside) | Symmetrical triangle tops breakout (downside) |
| #Formations among 500 stocks from 1991 to 1996 | 162 | 93 |
| Reversal or consolidation | 63 consolidations | 93 reversals |
| #False signals | 8 (5%) | 6 (6%) |
| Average rise/decline of successful formations | 37% | 20% |
| Average decline/rise of failed formations | 20% | 15% |
| #Formations that reached the price target | 124 (81)% | 54 (62%) |
| The average length of the formation | 2 months (57 days) | 2 months (50 days) |
Symmetrical triangle pattern strategy – conclusion
Although we could not make a strict backtest with trading rules of the symmetrical triangle pattern strategy, we made good use of the research by Thomas Bulkowski.
Nevertheless, we recommend being cautious due to the lack of 100% quantified trading rules. Bulkowski’s research is based on after-the-fact analysis. You should be cautious about any technical analysis that is not based on 100% verifiable rules. There is a reason why the name of the website is Quantified Strategies! You can have a look at our good and profitable trading strategies, or you can find our absolute best strategies behind a paywall:
FAQ:
What Are the Key Characteristics of a Symmetrical Triangle Pattern?
The symmetrical triangle pattern has a symmetrically triangular structure with a down-sloping upper boundary and an up-sloping lower boundary. The descending upper line signifies consecutively lower swing highs, while the ascending lower line indicates consecutively higher swing lows.
How Can Traders Manage Risk and Protect Their Capital with the Symmetrical Triangle Strategy?
Traders can manage risk by trading with a fraction of their account balance, following the 1% rule. Position sizing is crucial for risk management. Using a stop loss, placed beyond the other boundary of the triangle, is also an effective risk management approach.
How Can Traders Continually Improve Their Understanding and Application of the Symmetrical Triangle Strategy?
Traders can improve their understanding by continuously studying markets, identifying symmetrical triangle patterns, and observing post-formation market behavior. This ongoing analysis helps traders refine entry points, stop-loss placement, and profit-taking strategies.