Forex Triangle Trading Tutorial
One of the most popular patterns utilised by technical analysis traders is the triangle; these can offer a potential setup for price action traders. However, taking every trade as per textbook classical technical analysis is not necessarily the best approach. You need to have an edge – and if you don’t you will have negative expectations each time you trade.
This triangle trading tutorial will look at the most common forms of these easily identifiable patterns. We certainly do not advise anyone to trade every triangle breakout as in the zero-sum game of Forex you may struggle to find an edge trading in the same direction as the “herd”. However, an understanding of the basics gives an insight into potential order placement and a failed breakout for example can sometimes present an opportunity for the astute trader.
First a look at the basics. Traders utilising technical analysis view triangles as showing the “winding up” of price as neither the bulls nor bears can move price in a prolonged direction. This means that some form of equilibrium is therefore evident. At the beginning of its formation the triangle is at its broadest level. When a market continues trading in a consolidating range the price action compresses and the apex of the triangle is formed. Two converging trend lines gives us an initial heads up that a triangle may be forming.
At a basic level the triangle represents both the buyers and sellers failing to advance the trend in their desired direction.
There are different triangle formations as follows:
Symmetrical Triangle Pattern
A symmetrical triangle comprises of two trend lines:
- A lower support trend line
- An upper resistance trend line
There is no particular bias with a symmetrical triangle unless the market has given another indication of where it may want to go; this could be a strong previous trend, a price action candlestick setup or some other information. This consolidation of the price action often leads to strong momentum when the upper or lower trend line is broken.
The triangle breakout is very similar to an inside bar breakout which is what we should expect given the similarities (price coiling tight before breaking out of a range and order flow building etc).
With regards to the pattern that must be formed before we look to deploy any symmetrical triangle trading strategies (in the post authors opinion)
- At least 2 touches are required to form the top resistance trend line.
- At least 2 touches are required to form the bottom support trend line.
Symmetrical Triangle Chart 2
Ascending Triangle Pattern
The ascending triangle pattern shows the bulls gradually pushing price into a resistance line and the bears failing to push price lower. This can be seen with the higher lows which form during an ascending triangle. The higher lows are showing the sellers can not push price as low on each consecutive attempt. The following is what I look for with regards to the pattern that must be formed before we deploy any ascending triangle trading strategies
- At least 2 touches are required to form the top resistance trend line
- Top resistance line should be horizontal (or very close)
- At least 2 touches are required to form the ascending support trend line
- Lower support line should be ascending as higher lows are formed
Descending Triangle Pattern
Descending triangle patterns are ideally found in a downtrend, these are considered a bearish signal. A descending triangle is the inverted picture of an ascending triangle pattern. With regards to the pattern that must be formed before we deploy any descending triangle trading strategies.
- At least 2 touches are required to form the bottom support trend line
- Support trend line should be horizontal (or very close)
- At least 2 touches are required to form the descending resistance trend line
- Resistance trend line should be descending as lower highs are subsequently formed
Descending Triangle Chart 2
Advanced Triangle Trading – Strategy Approaches
In liquid markets order flow can build around well formed triangles, with this in mind they can provide good breakout trading opportunities.
The breakout itself can be played with or without confirmation as per my breakout trading tutorial. The best triangle setups (from my perspective) have confluence with price action giving a leading indicator as to where price will go. Sometimes a failed breakout in one direction can likewise give a heads up as to the real deal if the opposing side is then penetrated (see the inside day false breakout post to gain an understanding of this strategy.
I do not subscribe to the “trading by numbers” approach that many so called experts teach, the bottom line is you will only make money in the long term if someone else is losing money, we should constantly be asking the question “are the herd trapped in a position now?”.
A false breakout (see chart below) can sometimes give a heads up that this “trapped trader” scenario may be playing out. This false breakout was a Pin Bar/hammer candle.
See how context is everything when it comes to price action reversal signals?
Volume information and triangle breakouts
Volume analysis plays a significant part in establishing a genuine breakout. Volume data provides additional information regarding the markets willingness to break away from an area. A triangle breakout on low volume is a hint that the smart money/big players are not participating in a move. This is only relevant for markets where the volume information can be read and not for Forex.
Triangle Target Projections
Triangle projections can be gained by taking the distance between the lowest and highest points at the start of the pattern and projecting from the breakout area. The reality is that many triangles will not hit this target. The information is something we can use when looking for confluence though. You don’t have to trade the triangle to use the projected target… The example below shows how a triangle projection can be used to give confluence to an existing trade idea. In this instance the triangle projection is aligned with the 61.8% retrace of prior wave lower.
Other points with reference to triangle trading strategies:
- For a Triangle profit target price projection. Measure the initial A B swing within the triangle and project a target from where price leaves (breaks out from) the triangle for a potential target. In my experience these targets are best used when combined with other technical analysis techniques.
- When profit projections are not hit the remainder of the projection can sometimes be hit on the other side of the triangle (look into this yourself… must be something to do with market harmonics)
- As with all trading entries I prefer to stick to the most liquid times of the day to enter. A breakout during the London open is more interesting than during quiet market hours
- Triangle pattern breakout as price breaks through a large forex round number after a bullish engulfing candle? Sounds good to me… Confluence, confluence and more confluence is my preferred scenario.
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