It is defined by two lines:
- A horizontal resistance line running through peaks.
- An uptrend line drawn through the bottoms.
While two bottoms belonging to the same trendline would suffice for pattern recognition, it is more favorable when there are more.
As price rallies, it finds resistance and begins to erase some of its gains.
The subsequent fall in price is shorter than the previous fall and this manifests the series of higher lows.
If a line is drawn above and below the pattern, the top line will appear straight while the bottom will slope upwards at an angle.
The higher lows indicate more buyers are gradually entering the market and buying pressure increases as price consolidates moving further towards the apex.
If price can break through the resistance level, that level will now act as a support level
The breakout can occur based on technical analysis and/or be caused by news flow so it is worthwhile to also consider the fundamentals and market sentiment when using this pattern.
Watch out for fakeouts (false breakouts) carefully as they might be easily confused with the true ones when, in fact, the price is going to retreat back into the triangle.
Continuation patterns are expected to lead to the continuation of an existing trend.
Continuation patterns also include symmetrical triangles, descending triangles, wedges, flags, rectangles, and pennants.
Breakouts can also happen in both directions. Statistically, upward breakouts are more likely to occur, but downward ones seem to be more reliable.
The majority of breakouts of either direction are observed in the second half of the pattern formation distance.
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