Monday, June 20, 2011

Triangle


Some general ideas on triangle pattern

Triangle pattern is the topic of the post on the blog ‘Trend’ today. This is a technical continuation or a reversal pattern that you may find in any financial market on any time frame. Let us look at the chart before we could go on to theoretical and practical aspects of trading the pattern. 

4 points must be present for a triangle to be a valid pattern

As you may see from silver chart above a triangle is a chart pattern that shows that prices are in a range and moving within boundaries of the pattern. There are a lot of technical analysts that would agree that you need four points (two for support and two for resistance) in order for the structure to be valid. Coming back to silver chart we identify points number 1 and 3 as support and points number 2 and 4 as resistance. 

Ways to trade a triangle

When you have those points a price movement beyond those points would mean a breakout, which is an opportunity for you to go in the direction of the move. Breakouts of the pattern very often create big and fast moves and if you want to trade it, it is better to enter the move at the very breakout point. You can place a very small stop loss order and move it as the market moves in the direction of a breakout. In case of a false break your loss would not be huge. Since there are a lot of false breaks on all technical patterns, small stop is a must.

An alternative way to play the pattern is to by at number three if you expect a bullish move and to sell at number four if you expect a bearish move. I like doing that when I see a reversal pattern at the level at the smaller time frames (mostly at 15 or 5 minute charts). I might enter with two positions. I would exit the first one close to a trendline of a triangle and leave the second one in expectation of a true breakout. If a breakout of the pattern is false I close the second position at the sign of a reversal. Generally I move my stops placing them below daily, 8 hour or 4 hour chart lows or highs (depending on which direction the market is going). So, if breakout of the pattern is false, my stop is usually in the profit zone and is closed when market reaches the level.

News is an important factor when you are trading triangle breakout 

You know how much I stress importance of fundamental news. I will repeat myself by stressing that you should check whether any important news is coming when the price approaches one of the trendlines of the triangle. This is my observation and it might be kind of subjective but I noticed that most pattern have false breakouts when they happen without any news ‘back up’. And on the contrary, when news pushes price beyond the territory of a pattern the breakout is usually not false.
Hope the post explained you a little about triangle pattern trading. 

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Disclaimer
Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.