How to Profit Consistently From Triangle Patterns
In this blog post, we will examine the triangle patterns and how traders can benefit from this chart pattern.
There are three types of triangle patterns:
a) Ascending triangles
b) Symmetrical triangles
c) Descending triangles
Whatever the type of triangle pattern seen on the charts, they all share certain characteristics which are outlined below.
– All triangle patterns are bordered by two trend lines. The upper trend line forms the price resistance and the lower trend line forms the price support.
– As a result of the resistance and support formed by the trend lines, the movement of the price of the currency pair being traded will be within the confines of these trend lines.
– The two trend lines are not parallel, but rather converge towards each other to form the apex of the triangle.
It is important to take note of these three characteristics outlined above, as they will form the basis of trading decisions that are made from the triangle patterns.
What are ascending triangles? The ascending triangle is a chart pattern formed by a trend line which is horizontal and acts as a resistance, and a diagonal trend line which ascends to meet the horizontal trend line and acts as a price support. The pattern can be traced on the chart if each trend line can connect three points of price highs (horizontal trend line) or price lows (ascending trend line).
The pattern is created because while prices are capped to the upside, the price at which sellers exit short positions within the pattern get progressively higher, indicating that selling momentum is getting exhausted and that buyers are about to take over. As the ascending trend line and the horizontal trend line converged to form an apex, full-scale buying ensues and the price of the currency pair will break out of the resistance cap formed by the horizontal trend line.
Trading Opportunity: Most books and trading resources will tell traders to trade the breakout. But the truth is that those who wait to trade the breakout alone will be losing a lot of money from trading within the triangle. As price bounces from the horizontal resistance to the ascending support, there are opportunities to sell and exit, then buy and exit, until prices are very close to the apex of the triangle. Since the bias of the price action is in the buy direction, traders could decide to buy off the support and exit at the resistance until when prices are close to convergence point. That way, if prices actually break out early, you can catch the move.
From experience, we have found out that traders sometimes have issues with the breakout. So the best approach here would be to watch the price action as prices approach convergence, and if the candle in view closes above the horizontal resistance in an active buy trade, then set a trailing stop and follow the breakout to its logical conclusion.
The descending triangle is the opposite of the ascending triangle. It is formed by a horizontal trend line acting as a price support and a descending trend line which functions as a progressively decreasing resistance. The pattern is formed because buyers are gradually exiting positions, and sellers are gradually taking over, forcing the resistance to progressively pressure prices until the currency pair breaks below the support.
Trading Opportunity: Simply reverse the scenario for the ascending triangle and apply it here. Trade within the triangle in the direction of the trade bias, which is to sell at the resistance and exit at the support, until price is close to convergence when a trader can initiate an active short trade, watch for a candle to close below the support, then use a trailing stop to follow the breakout to its logical conclusion.
The symmetrical triangle is formed by a descending upper trend line and an ascending lower trend line. There is no bias for the trade; the currency pair could break out either to the upside or downside. This gives traders the opportunity to trade within the triangle in both directions: buy at support and exit at resistance, then sell at resistance and exit at support.
Traders must exit any of these trades when prices begin to approach the apex of the symmetrical triangle. To catch the breakout, traders MUST use pending stop orders on both sides. If one is activated, the other is closed so that the active trade can be followed to its logical conclusion.
Practice these trades on a demo account until you feel comfortable trading them in your live account.