The triangle pattern is one of the common chart patterns you will encounter when analyzing stocks for short-term trading, and the most reasonable way to trade the pattern is the breakout strategy. What is the breakout triangle strategy?
The triangle breakout strategy aims to trade into a trend continuation following a price breakout from a triangle consolidation pattern. With this strategy, the trader tries to go long when there is an upside breakout of a triangle pattern in an uptrend, or go short when there is a downside breakout of a triangle pattern in a downtrend.
Keep reading to learn more about this strategy. At the end of the article, we provide you with a backtested breakout triangle strategy (actually, many breakout triangle trading strategies).
)Before you continue reading, you might also like our previous research on breakout trading strategies.)
Table of contents:
What is a triangle in trading?
A triangle is a continuation chart pattern that has the shape of a triangle. It represents a consolidation in the price trend and is formed by narrowing price swings. Attaching a trendline across the swing highs and swing lows gives the shape of a triangle. The triangle is widest at the beginning of its formation, but as the market continues to trade in a sideways pattern, the trading range keeps narrowing until the price breaks out of either the upper or lower boundary.
The triangle represents a temporary pause in the market, both from the buy-side and the sell-side — the supply line diminishes to meet the demand. The upper boundary of the triangle represents the supply line (resistance level), while the lower boundary represents the support level or the demand line.
Being a continuation pattern, the price is more likely to break out in the direction of the trend preceding the formation of the triangle pattern, although it can occur in either direction.
What is the breakout triangle strategy?
The triangle breakout strategy is a trading technique that aims to trade the continuation of the prevailing trend following a price breakout from a triangle consolidation pattern. With this strategy, the trader tries to go long when there is an upside breakout of a triangle pattern in an uptrend, or go short when there is a downside breakout of a triangle pattern in a downtrend.
What should be the target of a triangle breakout?
The target of a triangle breakout should be the same size as the base of the triangle. So, to get your target when trading a triangle breakout, measure the base of the triangle and then project it from the breakout level.
What is a false triangle breakout?
There is always the risk of false breakouts when trading the triangle pattern. A false triangle breakout occurs when the price breaks out of the pattern and the subsequent price bars move back into the triangle, faking out traders who traded the breakout. It is a common occurrence in the market. Some traders consider it a sign of smart money manipulating the market to bring in more market orders to fill their positions.
What are symmetrical, ascending, and descending triangles?
There are three types of the triangle pattern:
Ascending triangle
In this type, the price swing highs are at the same level, giving it a horizontal upper boundary (resistance level), while the swing lows are rising, giving it an ascending lower boundary (support level).
An example of an ascending triangle is listed below:
Descending triangle
This type has a horizontal lower boundary (support level) and a descending upper boundary (resistance level). That means the swing lows are around the same level while the swing highs are descending.
An example of a descending triangle is listed below:
Symmetrical triangle
In this type, the upper boundary (formed by the swing highs) is descending, while the lower boundary (formed by the swing lows) is ascending.
An example of a symmetrical triangle is listed below:
Breakout triangle trading strategy (backtest and example)
It’s pretty demanding to make a breakout triangle trading strategy with strict trading rules and settings because of all the rules required. It’s possible, of course, but we believe some already published stuff is good enough.
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 rather on visual confirmation. Nevertheless, we believe his findings are a decent approximation of the usefulness of the triangles.
Bulkowski, an engineer, sat down and went through technical formations for 500 stocks over a period of five years. This gave a total database of 2 500 years, although of course there are sources of error as all the stocks are from the same time period. In total, he registered over 15 000 technical formations, of which he divided rectangles into two groups: Rectangle bottoms and rectangle tops.
Ascending triangle breakout strategy backtest
We summarize Bulkowski’s findings in this table:
| Description | Ascending triangle breakout |
| #Formations among 500 stocks from 1991 to 1996 | 725 |
| Reversal or consolidation | 196 reversals, 529 consolidations |
| #False signals | 230 (32%) |
| Average rise of successful formations | 44% |
| Average decline of failed formations | 21% |
| #Formations that reached the price target | 439 (89)% |
| The average length of the formation | 2 months (64 days) |
Descending triangle breakout strategy backtest
Let’s switch to the statistics for the descending triangle:
| Description | Ascending triangle breakout |
| #Formations among 500 stocks from 1991 to 1996 | 689 |
| Reversal or consolidation | 267 reversals, 422 consolidations |
| #False signals | 27 (4%) |
| Average decline of successful formations | 19% |
| Average rise of failed formations | 42% |
| #Formations that reached the price target | 256 (67)% |
| The average length of the formation | 3 months (87 days) |
Symmetrical triangle breakout strategy backtest
Let’s go on to look at the last statistic – the symmetrical triangle. Bulkowski decided to divide this group into two parts: the triangle symmetrical bottom and the symmetrical triangle top.
We start by looking at the symmetrical triangle bottom:
| Description | Upside breakout | Downside breakout |
| #Formations among 500 stocks from 1991 to 1996 | 63 | 83 |
| Reversal or consolidation | 63 reversals | 83 consolidations |
| #False signals | 3% | 2% |
| Average rise/decline of successful formations | 41% | 19% |
| Most likely rise/decline | 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) |
Let’s switch to the symmetrical triangle top:
| Description | Upside breakout | Downside breakout |
| #Formations among 500 stocks from 1991 to 1996 | 162 | 93 |
| Reversal or consolidation | 162 consolidations | 93 reversals |
| #False signals | 5% | 6% |
| Average rise/decline of successful formations | 37% | 20% |
| Most likely rise/decline | 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) |
Breakout Triangle Strategy – conclusion
Although we were not able to make a strict backtest with trading rules, we took 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. As a matter of fact, 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 is a triangle in trading, and how does it form?
A triangle is a continuation chart pattern that resembles the shape of a triangle. It signifies a temporary pause in the market, characterized by narrowing price swings. The pattern is formed by connecting trendlines across swing highs and swing lows. The breakout occurs when the price moves beyond the upper or lower boundary.
– What is the target of a triangle breakout?
The target of a triangle breakout is typically the same size as the base of the triangle. Traders measure the base of the triangle and project it from the breakout level to determine the potential target of the trade.
– How do you trade an ascending triangle breakout?
Trading an ascending triangle breakout involves going long when there is an upside breakout from the pattern. The strategy may include setting specific rules for entry, stop loss, and profit target based on the characteristics of the ascending triangle.
