In our last lesson we learned how to spot the three different types of triangles on a chart, the ascending triangle, the descending triangle, and the symmetrical triangle. In this lesson we are going to look at the strategies for trading these patterns complete with entry and exit points.
As we learned in the last lesson, 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 look to go long or short.
As with the other patterns we have recently learned about, when traders spot an ascending triangle, 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 with the starting low point of the triangle, which is then projected upward from the breakpoint. The stop is then placed just below the most recent trough of the pattern.
The Ascending Triangle Strategy:
The descending triangle is the mirror image of the ascending triangle and normally seen in downtrends. When traders see this pattern they will look to trade the break of the lower support line. The target is then calculated the same way as with the ascending triangle, by measuring the distance between the high and low points at the start of the pattern and then projecting that distance downward from the break. The stop is then placed just above the nearest peak.
The Descending Triangle Strategy:
The symmetrical triangle can be seen and traded in either up trends, down trends, or sideways markets. When traders find this pattern on a chart they will look to trade in the direction of the breakout, as this is a sign that one direction either the bulls or the bears have won out over the other. Like ascending and descending triangles, traders will look to trade the break of the pattern, calculating their target by measuring the distance between the high and low at the start of the pattern. The stop will then be placed just outside of the nearest peak if the market breaks to the downside or the nearest trough if the market breaks to the upside.
The Symmetrical Triangle Strategy:
For confirmation on all three strategies, traders will look for declining volume as the pattern matures and then increasing volume on the break.
That completes our last lesson in our series on chart patterns. You should now have a good understanding of many of the most common chart patterns as well as common strategies for trading those patterns. In our next lesson we are going to start our series on learning technical indicators by looking how these tools are used in trading and how they can be used to complement the concepts and strategies we have learned in our chart patterns lessons.