I want to share an explosive chart pattern that is easy to identify and profit from, because this information has made me, and many investors I know, millions.

It is called the symmetrical triangle.

The symmetrical triangle is usually a “continuation pattern.” So, whatever direction the prior trend was, is most likely the direction in which the stock will break out (if the prior trend was up) or break down (if the prior trend was down).

There are two other popular triangle patterns that are powerful in their own right called the ascending triangle (typically found in uptrends) and the descending triangle (typically found in downtrends). Learn more about these chart patterns.

But the symmetrical triangle is neutral, and is found in downtrends as often as it’s found in uptrends.

There are two trendlines (black lines) that form the symmetrical triangle: One sloping up, and one sloping down. (The green line represents the stock.)

To form the symmetrical triangle, we draw two converging trendlines, and each is touched twice. The upper trendline can only be drawn after the stock has made a second peak lower than the first (blue dots).

The lower trendline can only be drawn after the stock has made a second low higher than the first (red dots).

So, altogether, there are at least four reversal points.

When you draw the triangle’s trendlines, use the closing prices — NOT the intraday prices. A breakout or breakdown occurs when the stock closes above or below the trendline.

The wide left side is called the “base,” and the point on the right side is called the “apex.”

Breakout/Breakdown

 

Once you are able to draw the two trendlines, you will know exactly where the two lines would meet. Remember, prices should break out or break down by about two-thirds to about three-quarters of the horizontal width of the triangle.

If the breakout doesn’t happen by three-quarters of the horizontal distance through the triangle, then the pattern loses its potency. It’s also more likely that the sideways trend continues until something new occurs.

Volume

Volume should be heaviest at the base, and should gradually decline as the trading range narrows. A sudden burst of volume should confirm the breakout or breakdown.

Usually, you can find clues in the price volume action leading up to the breakout or breakdown. This can help you determine the likelihood of a continuation, and it can give you the alert that the big move is just about to occur.

Typically, you’ll see volume pick up slightly right before the big move. But, compared to the volume activity leading up to it (because volume should “dry up” through the triangle), the volume is noticeably higher.

Estimated Minimum Price Objective

The minimum price objective is the vertical distance of the widest part of the triangle (the base). In the chart above, this distance is indicated by the orange arrows. If the distance was 10 points, then look for a 10-point advance/decline once the trendline is penetrated (in terms of the closing price).

Remember, whenever I say “minimum price objective,” I mean exactly that: “minimum.”

Prices can move much further than that, and usually do when strong volume on the trendline penetration occurs. Always consider past key support or resistance levels to stop the advance or decline — or, if they are penetrated, for that advance or decline to continue.

Return Test 

Once the breakout occurs, the support or resistance levels are found at the stronger trendline. In other words, if the breakout is to the upside, then the upper (descending) trendline was the one that was broken. So, the lower (ascending) trend line acts as support.

You’ll find that, quite often, there is a return back to test that trendline. If the breakout is to the downside, then the lower (ascending) trendline was the one that was broken. So, the upper (descending) trendline acts as resistance. Often, there is a return back to test that trendline.

This return test can be an opening to pick up a stock at a great entry point before it’s off to the races.