Triangles usually occur when a stock gets ahead of itself. Temporary consolidation is necessary. The shape of a triangle can take various forms, but the most common type is the symmetrical triangle.
In order for a triangle to be formed, at least four reversals must occur. As the stock consolidates, a series of lower highs and higher lows will be put into place. Once the triangle pattern is completed, the stock will break out in one direction or the other from the apex.
As we’ve said, in most cases, the prevailing trend will continue. Thus, if the stock was previously in an uptrend, that trend will likely continue as the stock moves out of the triangle. In figure 6, you can see the stock broke out of its triangle formation and quickly powered its way to new price highs.
Occasionally, triangles produce false breakouts. If the stock breaks out of the triangle, it may quickly roll over and head in the other direction. In order to protect against a false upside breakout, pay close attention to the trading volume. The stock should break out on heavy volume that’s at least two or three times the daily average.
Downside breakouts are different. They typically occur on light volume that picks up as the decline intensifies. Huge volume on a downside breakout is often a signal of a shakeout that could mark a quick bottom.
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