What is Symmetrical Contracting triangle pattern?
Symmetrical contracting triangle pattern is a chart pattern used by traders in technical analysis. It is a neutral chart pattern, which means it can be a either reversal pattern or continuation pattern depending on the breakout.
The price action bounce back from resistance and support level and consolidates towards the apex point. The Highs and lows keep getting smaller with the price moving towards the apex point.
Understanding the pattern.
During the formation of Symmetrical contracting triangle pattern, the trend can be either upward or downward. When price bounces back from the resistance level or support level, the next resistance level will be below the previous resistance level or next support will be higher than before.
This happens because the buyers and sellers are increasing with price action moving forward, resulting in price to contract into a consolidated area.
This Phenomenon results in breakout from either direction. Once the breakout happens, traders tend to aggressively buy or sell the share depending on which direction the price broke out.
How to identify Symmetrical contracting triangle pattern?
The famous quote “History repeat itself” is valuable concept to identifying the chart pattern in stock market. As we know the patterns today, it is come to known as patterns because it occurred millions of times before in the chart.
Patterns repeat itself, Previously, the patterns had occurred and during the formation the traders tends to act as an individual. They wait for the formation, they plot the trend line, and they wait for the breakout. Here are few things to remember while identifying the pattern.
- Plot the trendlines when the second resistance level and support level is below and above the previous one, respectively.
- The price will move between the trendline till the apex point.
- The breakout will happen on either side in symmetrical contracting triangle pattern
How to do trading with Symmetrical contracting triangle pattern?
When to take entry?
Symmetrical contracting triangle pattern entry point will depend on which side the breakout will occur. Patience is the key to increase the probability of your trade to be successful. Many traders enter the market before the breakout, resulting in losing their investment.
It is unpredictable to decide whether the price will go up or down, making the investment risky before the breakout.
- When the price breakout at the resistance level, wait for the second candle to give confirmation. When the second candle closes above the breakout candle close. It will be your que to take buy position in the market.
- The closing of the second candle will be your entry point. You can enter into a buy position.
- Breakout at the Support Level, wait for the second candle to give signal, if the second candle closes below the Breakout candle. You can enter into a selling position.
- Closing of the second candle will be the entry point.
Use of Indicators before entering the market.
Indicators are used to interpret stock or financial index data in an attempt to forecast market moves. They are quantitative in nature. They help traders to make investment and trading decisions. Here are few indicators to use before entering into a position.
- Volume: During the breakout, the volume should be high. It will indicate that there is large number of traders getting involved during the breakout.
- RSI: Relative Strength Index (RSI), it oscillates between zero and 100. Traditionally, the RSI is considered overbought when above 70 and oversold when below 30. It will give indication if the stock has become overbought or oversold following a breakout.
- MACD: Moving Average Convergence/Divergence, it is specifically designed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
Where to add stoploss?
Stoploss is a tool to reduce the probability of risk factor. Stoploss provides security in long position as well as the short position. It works when the orders are executed with instructions to close a position when it reaches a certain price known as stop price.
Generally, it takes lot of experience to know where to place stoploss. Placing stoploss within minimum range often result in price action hitting the stoploss first. Stoploss does reduce your risk, but it is a risky situation to place a stoploss within limits. Many new traders often experience their trades hitting stoploss before the target. Here are two stoploss which can be placed for Symmetrical contracting triangle pattern.
Fixed Stoploss
Stoploss which is placed without any modification throughout the trade is called fixed stoploss. When price breaks out at the resistance level or support level. The Stoploss will be placed near the Opening of the breakout candle.
Trailing stoploss.
Stoploss which is placed and modified later during the trade to maximize profit is called trailing stoploss.
- When Price action breakout at the Resistance level. You can place trailing stoploss near the opening of the breakout candle and modify it later accordingly. For example, you enter into a buy position at 110 points and added your stoploss at 100 points. Let’s assume, you put the target at 140 but the price reaches 150, So increase your stoploss by 10 points. This way when the price reaches 200, your stoploss will be at 160. So, this will help you to maximize your profit and prevent you to lose your money as it were in stoploss 100.
- When price action breakout at the support level. The stoploss placement will be near the opening of the breakout candle, which can be modified later. For example, the entry is at price 500 and the stoploss is added near 520. Eventually, when the price reaches 470, you can decrease your stoploss till 510. This way if the price reaches around 400 there will be 50 points gap between the price and stoploss. This strategy will help you earn profit without the risk of losing all your profits earned during that trade.
Target placement in Symmetrical Contracting Triangle Pattern
The Gap between the first resistance level and support level will be the target from the entry point. For example, if the gap between them is of 30 points, the target placement will be 30 points from the entry level.
Although, you can use trailing stoploss to maximize your profit in symmetrical contracting triangle pattern.