The base of the triangle pattern is formed with five weeks of price activity consistently moving in the same direction. The candles in the triangle base are all the same color.
With the dollar-yen chart the down-sloping triangle is also part of a pattern of trading bands. The first trading band starts with support near 97.5 and resistance is near 101.5. The width of this trading band is measured and projected upwards to give a target for an upside breakout. The target level is near 105.5 - near the high achieved in January, 2014.
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This shows that the trading band analysis is the more powerful chart pattern for the dollar-yen. The down-sloping triangle develops inside the trading band environment.
Down-sloping triangle patterns have a 70 percent probability of a downside breakout. This also means there's a 30 percent probability the downside breakout will not develop. When the downside breakout fails the most common result is for the price to move sideways using the support level. It's unusual for the price to move upwards in an upside breakout from a down-sloping triangle pattern.
Triangle pattern breakout targets are calculated by measuring the base of the triangle and then projecting this value from the point of the breakout on the trend line. With the dollar-yen chart pattern the breakout is near to the apex of the triangle pattern. The pattern price projection target is near 105.5. This is also the same value as the trading band price projection.
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The breakout above the value of the down-sloping trend line has a lower probability of success. This means there's a lower probability that the breakout will achieve the upside projection targets near 105.5. This is a weak upside target with low momentum, so there is a high probability the rally will fail to reach the 105.5 target level. Traders use caution and a very tight stop loss for trading this rally breakout.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders – www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.