Notes from "Technical Analysis of Stock Trends" 4th Edition,2011 by Robert D. Edwards & John Magee (p.87-102)
ASX.DDR Chart on Mar 19, 2018
The commonest form of Triangle is composed of a series of price fluctuations, each of which is smaller than its predecessor.
While the process of contraction which makes up the price action, trading activity exhibits a dimishing trend.
As prices work their way along in narrower and narrower fluctuations toward the apex, volume ebbs to an ebnormally low daily turnover.
For suddenly and without warning, prices break out of their Triangle with a notable pick-up in Volume, and leap away in a strong move which tends to approximate in extent the Up or Down move which preceded its formation.
There is seldom any clue given on the one chart containing the Triangle to tell in which direction prices are going to break out of pattern until that action finally occurs.
There is nothing to do but WAIT until the market makes up its mind which way to go.
"Making up its mind" is what the market seems to be doing when it builds a Triangle; everything about this pattern appears to exemplify Doubt, Vacillation, Stalling until finally a decision is reached.
Prices may move out of a Symmetrical Triangle either Up or Down. There is seldom if ever any clue as to direction until the move has actually started.
It is essential that an Upside break in price must be confirmed by a marked increase in trading volume; lacking volume, do not trust the price achievement. But a Downside breakout does not require confirmation by a pik-up in activity.
Symmetrical Triangles are subject to FALSE moves to a far greater extent than the HnS or any of the other formations. Unfortunately, some of these false moves cannot be identified as such until after a commitment has been risked.
But, most Symmetrical Triangles behave themselves properly, produce no false signals which cannot be spotted before any damage is done. Upside BOs on high Volume may be premature in the sense that prices return to pattern and do some more "work" there befire the genuine Up trend gets under way, but they seldom are false.
Post-breakout reactions/ pullbacks: the initial BO move from a Symmetrical Triangle may halt before prices are carried very far away from the pattern and be followed by a minor reaction which carry quotations back to the nearest pattern boundary.
Behind the scenes we can imagin the process: new money constantly coming in and meeting supply from owners increasingly anxious to cinch their profits. Eventually the offerings of the latter are all absorbed, or perhaps withdrawn, and then professionals as well as hopeful investors suddently discover that there is no stock ahead on the books and a rush to buy results.
The odds are that the new move will proceed in the same direction as the one prior to the Triangle's formation. These odds are greatest in the early stages of either a primary Bull or Bear market, with the chances of reversal increasing as those major trends mature.