In our last lesson, we learned about the different chart types of triangle chart patterns: the ascending triangle, descending triangle and symmetrical triangle. In today’s lesson, we’re going to learn specific strategies for trading each of these patterns, complete with entry and exit points. So let’s get started.
The direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend, determines whether the pattern is a continuation or a reversal pattern, and therefore whether traders are going to look to get long or go short as a result of the breakout. As with other patterns that we’ve recently learned about, when traders spot an ascending triangle, which we’re going to start with, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle, and the starting low point of the triangle, which is then projected upward from the break point.
The stop is then placed just below the most recent trough of the patterns. So let’s look at an example here. We’ve got our ascending triangle that we learned about in last lesson. We have the break. We then measure the distance between the high and the low of the start of the pattern, and we get five points. So that is our target for the buy entry of the trade, and then we place our stop just below the most recent trough of the pattern. OK?
The descending triangle is basically just the opposite. It’s a mirror image. We’re normally going to see these in down trends, and we’re going to look to trade, or traders are going to commonly look to trade the break of the lower support line. The target is then calculated in the same way as the ascending triangle, by measuring the distance between the high and the low points, and then projecting that distance downward from the break.
The stop is then placed just above the nearest peak. Here’s our descending triangle. You can see there, the same one from last lesson. We see the break here. We see the distance between, or measure the distance between the high and low at the start of the pattern. We get 800 points there, so that’s our target for the trade. And then we place our stop just above the most recent peak. All right.
The symmetrical triangle can be seen in either up trends, down trends, or most of the time it is commonly seen in directionless markets. As it’s an indication that neither bulls or bears are winning out. That’s why the market range contracts as they continue to fight each other.
That’s why traders are going to look to trade in the direction of the breakout. It doesn’t matter which side it breaks out on, because the break out is an indication of the side that’s won. So if it breaks to the upside, the bulls have won, if it breaks to the downside, the bears have won.
We’ve got our symmetrical triangle here that we’ve looked at from last lesson, and in this instance, it’s broken to the downside, so traders are going to look to get short there, commonly. And the target is measured in the same way as it is with the other two triangles, by getting the distance at the start. So this case, it’s 1050. Project that downward, and that’s our target for the trade.
And then the stop, because it’s broken to the upside, is placed just above the most recent peak. If that trade had broken to the upside, or if the market had broken to the upside of the symmetrical triangle there, then everything would be done in reverse. All right.
As with our other lessons, and the other patterns that we’ve looked at recently, in those volume is often looked to as a confirmation of all three of these patterns. Traders are going to like to see a decrease in volume as the pattern matures, and then an increase in volume on the break, of the break out from the triangle. So keep that in mind just as with our other strategies that we’ve looked at most recently.
All right. That’s our lesson for today, and that’s going to complete our lessons on charting patterns. In our next lesson, we’re going to start to look at a trading indicators, or technical indicators, which are going to be good for complementing a lot of the stuff that we’ve learned so far.
The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.