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Wednesday, November 28, 2007

SYMMETRICAL TRIANGLE PATTERN – Part 1: Formation

Symmetrical Triangle is a neutral pattern that normally forms during a trend (either uptrend or downtrend) as a continuation / consolidation pattern. The breakout usually occurs in the same direction as the existing trend.

The Formation of Symmetrical Triangle Pattern



Symmetrical Triangle Pattern contains at least two lower highs (peaks) and two higher lows (troughs). When the peak as well as trough points are connected by separate lines and then extended to the right, they would respectively form a descending upper line and an ascending lower line, creating a pattern that looks like a symmetrical triangle.
In this case, the descending upper line acts as resistance, whereas the ascending lower line as support.

This pattern occurs because the highs (peaks) are moving progressively lower, whereas the lows (troughs) are moving progressively higher.
As the range between the peaks and troughs are narrowing, the upper & lower lines converge at the "Apex", which is located at the right of the triangle.
The completion of the pattern occurs when prices break out through either the upper line (i.e. breakout to the upside) or lower line (i.e. breakout to the downside) before finishing the apex of the triangle.

A triangle pattern may sometimes be associated with a “coil”. A “coil” needs to recoil (contract) in order to build up enough potential energy for its next expansion.

The pattern implies that buyers and sellers are in a period where they still hesitate where the market is heading. However, in the end, either the buyers or sellers managed to find enough conviction to break out to one side with great force.

To be continued to Part 2: Important Characteristics of Symmetrical Triangle pattern.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

3 comments:

Anonymous said...

Hi OTB,

I know you have not talk about volume yet but I would like to ask a question about volume which bother me for quite sometime. What is the meaning of the volume bar colour(black bar and red bar)in the chart?

Thanks for your time.

John

Tony Chai said...

Hi John :

In normal circumstances, a red volume bar indicates that there are more selling activities, whereas a black volume bar indicates more buying activities.

You are right to point out that chart patterns should be confirmed together with trading volume.

Yours Truly,

Tony Chai
My Options Trading Blog

OPTIONS TRADING BEGINNER said...

Hi Tony,
Thanks for your kind response to John. :)

Hi John,
As Tony mentioned, red volume bar indicates there are more selling activities during that period, whereas black volume bar indicates that there are more buying activities during the period.

In candlestick chart, a red volume bar usually accompanies red candlestick (bearish candle), while a black volume bar usually accompanies white candlestick (bullish candle).

With regards to volume analysis for Triangle patterns, please refer to:
“Part 2 - Important Characteristics” for Triangle Pattern under “Volume” part.

* ASCENDING TRIANGLE PATTERN – Part 2: Important Characteristics
* DESCENDING TRIANGLE PATTERN – Part 2: Important Characteristics

Cheers,
Options Trading Beginner