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By Daryl Guppy

Chart patterns capture the emotions of the market crowd and signal the probability of action. Some patterns are very reliable and we look at triangles and bullish flags. They are used to set exact price targets. Some patterns look impressive, and may have exotic names, but they are not particularly reliable or useful for making trading decisions. We avoid these patterns. There are three types of triangle patterns - up sloping, down sloping, and equilateral or symmetrical. The most useful feature of these patterns is the way price projections are calculated. This is done by measuring the base of the triangle and then projecting it upwards, or downwards. This provides a very precise method of measuring risk and reward as shown.


The upward sloping triangle is a common bullish pattern where short term resistance is challenged by a short term upward sloping trend line. The up sloping triangle forms when a horizontal resistance line is intersected by a rising trend line. This is a strong chart pattern and breakouts present short term trading opportunities, taking one to five days to reach their targets. In a bullish market this pattern has around 70% reliability.


The downward sloping triangle is the exact reverse. The same techniques are used to establish price targets. In a bearish market this pattern also has around 75% reliability.


An equilateral or symetrical triangle shows market indecision. It is formed when it is possible to plot two equally valid trend lines moving in opposite directions. The upper trend line slopes downwards. The lower trend line slopes upwards, and when combined they form the equilateral triangle. Two powerful trending forces are equally balanced. This pattern most often occurs prior to an anticipated news event. This tells the trader there is indecision in the market. One group of people who hold the stock believe the news event will be bad for the stock. They want to sell before the news hits. They set the down trend line. Others believe the news event will be positive so they want to buy before the news breaks. They set the uptrend line. The base of this pattern is measured in the same way as for the previous up sloping and down sloping triangles. The major difference with this pattern is that the price target is plotted from the point at which the breakout occurs above the upper or the lower edge of the triangle. In a down market the pattern often doubles its downside projection target. This pattern does not offer a strong probability of a price break in one direction or the other. This pattern is evenly balanced, with a 50% chance of breaking upwards or onwards.






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