The triangle shown here shows a break towards the upside.
The triangle shown here shows a break towards the downside.
Triangles are classified as consolidation chart patterns which are formed with a series of lower highs, higher lows and an eventual breakout in an upward or downward direction. As consolidation and price converges to a tight band, volatility in the security decreases as well.
Triangles can be further classified as ascending triangles or descending triangles. An ascending triangle has an upward bias and is looked upon as a bullish signal while a descending triangle has a downward bias and is looked upon as a bearish signal.
How option traders can make use of triangles?
In a triangle, with decreasing volatility, option traders can place a straddle in anticipation of a breakout towards the downside or the upside. In the event of a significant price movement, the trader can profit from the straddle. Also, if an options trader sees that an ascending triangle is being formed and if he is very bullish on the underlying security, he can buy call options. If he is mildly bullish, he can choose to execute a range of mildly bullish option strategies. In a descending triangle, the options trader can choose to buy puts if he is very bearish. If he is mildly bearish,he can choose to execute an options strategy to capitalise on mildly bearish conditions.
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