Hello friends and welcome to this podcast by Angel One.
Do you know what symmetry means? If you cut a ball into two from the middle, the two halves of the ball will look the same, right? Or, if you draw a vertical line from the centre of your body, the two sides will look like mirror images of each other, right? But, if you cut an iceberg along the surface level of water, the two halves will not be mirror images, nor will they be of the same size. Do you know why? Because ice is lighter than water.
So, the ball and your body are both symmetrical, while the iceberg isn’t. This is what symmetry is - if you can cut something along the middle, and if the two parts are mirror images of each other, then that thing is symmetric.
But what’s the point of knowing all this? Can you spot symmetry in price charts?
To answer your question, yes - and in a lot of ways. Today, however, we are looking at one example - the symmetrical triangle pattern, and what it can tell you about the price of an asset.
If you are looking for a short explanation, here it is: Basically, a symmetric triangle pattern indicates shrinking volatility of an asset in the market, and consolidation of prices around a certain level. After the support and resistance converge to a point where the price consolidated, a breakout or breakdown of volatility and consequently prices might occur. Too complicated? Let’s break this down, and look at what the pattern looks like on a candlestick chart, and then we will see how to read it.
As we told you before, a symmetrical triangle pattern indicates a consolidation of prices around a certain area. This happens over a longer period of time and therefore, the symmetrical triangle pattern consists of multiple candlesticks.
To visualise a symmetrical triangle pattern, consider this: imagine a trendline that connects the successive peaks of a security’s candlestick chart. This is the upper trendline. Similarly, imagine another trendline that connects all the successive troughs. This is the lower trendline. Now, imagine that the successive peaks and troughs occur in such a way, that the two lines you had imagined, converge and meet at a point.
If you draw a vertical line from where you had started at the first peak or trough, the three lines connect to form a triangle - and that is it - this is the triangle you are looking for. Now, if you draw a horizontal line from the point of convergence to the line you have just drawn, it should divide the triangle into roughly mirroring upper and lower parts. Since it is symmetrical, we call it a symmetrical triangle pattern, And this is what the symmetrical triangle pattern looks like on a candlestick chart, in essence.
What if the upper trendline of the triangle is horizontal? In this case, we call the pattern an ascending triangle pattern. This implies that there might be a breakout in the future.
On the other hand, if the lower trendline of the triangle is horizontal, it is called a descending triangle pattern. This pattern indicates that there might be an upcoming breakdown.
Now, if the pattern occurs within a matter of a few weeks, then it probably isn’t a symmetrical triangle pattern, because this pattern usually takes a few months to form.
But what’s actually happening in those wicks and bodies of the candles inside the symmetrical triangle pattern. Basically, the converging peaks and troughs imply that the volatility of the asset is shrinking. Once the price of the asset consolidates at a point, it is forced to break down or breakout.
The benefit of knowing about this pattern is that you can calculate a target price for a breakout or a breakdown with it, place a safe stop-loss, and make an informed decision when trading a security.
So let’s take a closer look.
For calculating a target price, you will have to look at the difference between the low and the high at the starting of the pattern - which is, the opposite side of the converging point. Now, a breakout at the consolidating price point would be considered if the price moves up from there, by the difference we just calculated.
And where to place the stop loss? Right below the point of convergence of the two trend lines. This will help you safely place your bet, and avoid uncalled for losses.
One thing to keep in mind is that the symmetrical triangle pattern works well if you use it with other technical analysis indicators. For example, the RSI or the Relative Strength Index is used with this pattern to understand if a security has been overbought after the initial breakout.
Another cool technique you can use is called the price projection technique. The concept is simple. To locate an exit point on the candlestick chart, copy the width between the initial high and the initial low of the symmetrical triangle. Now, paste this vertical line at the convergence point. This is called the price projection level, and you can exit your trade at this point.
Although a little complicated, you can use this pattern to leverage some key moments in the price movement of a security over a long term.
So friends, this is all we hand for today’s podcast.
Here’s goodbye from Angel One. If you want to learn about other cool techniques used in stock market analysis, check out our other podcasts or visit www.angelone.in.