I like to keep my charts simple – simple is better! There is no need for a chart to look like a laser-light show. So, my favorite chart patterns are the simple shapes: Rectangles, pennants, flags, and triangles. All are simple, and all are consolidation patterns waiting for a break-out.
Take this /CL chart I did today (/CL is oil futures). An almost perfect descending triangle has been in play since April.
Notice the lower-higs? Notice the major support on the bottom of the triangle? Ya, it’s pretty much a classic descending triangle. If I were to trade a descending triangle, I would simply sell at the resistance (top edge), and buy at the support (bottom edge). Does this mean I will make money? No, but it gives me better odds.
The thing about any chart pattern, is you have to make sure it’s going to end up like the pattern you think it’s going to be. If you notice, oil broke out of the triangle a month ago – that is when the Saudi Aramco attacks happened. But It soon came right back into the triangle, and eventually bounced off support once again. However, if you were bullish on the break out, you would have lost if you held your position. Just goes to show you that NOTHING is 100% certain.
I look for certain things when I think I see a triangle: 1) Has the triangle resistance and support been touched at least 2 times each? And 2) Is the size of the triangle relative to the chart size. What I mean is… if it’s a daily chart, and I think I see a triangle but it has only been in the making for a week or 2, I won’t play it. Notice the chart above has been in play since April – that’s pretty convincing to me.
Lastly, in general, descending triangles usually break to the downside once they break out of that pattern. The opposite is true for ascending triangles. Does it always happen this way? NOPE! Again, NOTHING is 100% in the market, which is why you must do your homework and stay diligent with your trades.