Price formations in trend direction


No trend runs permanently as in the textbook: Sooner or later, chart formations form within a trend movement. These can both confirm and question the trend. Continuation formations not only indicate a continuation of the existing trend, but also provide indications of the potential that still exists.

Continuation formations are also called consolidation formations or trend confirmation formations. The formations occur within existing trends and are a strong indication that the market is merely taking a "breather" and will then continue to move in the previous direction.

A necessary condition for the occurrence of continuation formations is therefore an existing trend. Continuation formations are relatively short-term in nature.

Symmetrical triangles as consolidation formations

Most of the relevant literature sees triangles as the most important part of trend-confirming price formations. Symmetrical, ascending, descending and inverted triangles are well known. The latter, however, occur predominantly as reversal formations.

The designation as a triangle goes back to auxiliary lines that are drawn on the chart and produce the characteristic picture.

In a symmetrical triangle, the market consolidates while volatility gradually decreases. The market moves sideways, with the highs and lows being closer and closer together.

An ascending line is drawn along the lows of the consolidation, and a descending line along the highs. If both lines run (approximately) with the same slope, this results in a symmetrical triangle.

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The breakout point of a triangle

Since a triangle consists of two straight lines (geometrically, of course, it consists of three straight lines, but the base is not drawn in the context of charting), two upper and two lower reversal points are required in each case. If a symmetrical triangle occurs in an upward trend, an upward breakout is likely. This applies analogously to downward trends.

The breakout is considered to have occurred when the market breaks out of the triangle in the direction of the trend. The breakout point should occur at 65% to 75% of the horizontal distance of the triangle. The vertical distance of the triangle is added to the breakout point (or subtracted in downtrends) to give the chart price target of the formation.

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A breakout from a triangle formation is all the more meaningful the more indications accompany it. The trading volume in the underlying is particularly relevant. Within the triangle, turnover should decrease. Around the breakout, on the other hand, a clear increase in turnover should be visible.

If there is a return movement in the direction of the formation, turnover should fall again and only rise again when prices are rising again in the direction of the trend. The turnover within the formation should be looked at more closely. In an uptrend, turnover should be higher during upward movements within the triangle than during downward movements.