Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today, we will be discussing trading a common formation in the market known as a triangle formation. Trading in consolidating or congested periods within the market can prove difficult for a number of reasons, because of this, many traders choose to wait for breakouts to occur before looking to initiate their trades.
In today’s video, we will walk through interpreting and approaching price action surrounding the triangle formation.
What exactly is a triangle? A triangle is a period of activity within the market place, in which prices form what literally appears to be a triangle or wedge as it’s sometimes known on the chart. This chart shows a typical triangle formation and is highlighted using our line tool.
During this period of consolidation the currency pair is in the process of making lower highs and lower lows, as of yet price has not yet been able to decisively break through previously established support.
This tightening range of price can offer us a potential setup in terms of price action trading, as markets tend to trend and consolidate over and over. When we see consolidation, it is almost inevitable we are about to see a break to the reversal or continuation of the trend.
Triangle formations are not singular and do have circumstance based behaviour, in order to understand what we are looking at, we must research the documented types of triangles and typical behaviours to look out for surrounding them, so that we may anticipate and act in a way that sees us profiting from the result.
Let’s now look at the basic Forex triangle pattern types and identifying them based on their behaviour.
Ascending Triangle – typical characteristics include witnessing flat tops and higher bottoms on the candlesticks, which show bullish potential. When you identify this triangle on a chart, you should be prepared to catch a bullish price move equal to at least the size of the widest part of the triangle. In this manner, breakouts through the upper level are used for setting entry points for long positions.
Descending Triangle – They present flat bottoms and lower tops, the opposite of the ascending triangle and offer us bearish potential set up’s.
Next, we have wedges. A wedge is where the sides increase or decrease in the same direction as shown here.
Firstly we have a rising Wedge – typically we see higher tops and even higher bottoms, and this is viewed with bearish potential even though both sides are inclined upwards.
The Falling Wedge – is the opposite of the rising wedge presenting lower bottoms and even lower tops, this offers us bullish potential in the market and both wedges as viewed with great probability.
Next, we have the Symmetrical Triangle – the symmetrical triangles present with lower tops and higher bottoms as it continues to form giving itself a flag-like appearance. This is a fairly neutral signal that offers no particular bias to market direction when it does break out we expect to see moves equal to the widest part of the flag.
Bullish Pennant – These generally occur after price increases and end with a small symmetrical triangle, the reason these have bullish potential, even though a symmetrical triangle is they represent a period of consolidation after a move to the upside. They are generally smaller than the standard symmetrical triangle and occur during a trend Continuation.
The Bearish Pennant – is the opposite and comes after a price decrease; it ends with a small symmetrical triangle and is viewed with bearish potential.
Lastly, we have the Expanding Triangle – As the name would suggest, these are easily identifiable as they are basically a reversed triangle with the tops and bottom’s increasing as they form. The potential direction of the expanding triangle varies depending on the lines inclination.
If the sides are symmetrical, then the potential price move is in the continuation of the existing trend!
If both sides are Increasing, it has bearish potential!
If Both Sides are Decreasing, it has bullish potential!
If one side is steeper than the other, the potential price move is inclined in the direction of the steeper side!
Once proficient at identifying triangle formations, we then must come to realise the best method for trading these opportunities, in terms of safety, will always be the breakout. As we know the breakout of either line forming the triangle must consist of a candlestick forming over the line, retracing to the previous support or resistance that the formation offered, then giving us a candlestick formation that is showing rejection of that support or resistance.
The entry trigger will always come not after the line is crossed, but when we see the rejection after Retracement. In some instances, momentum will be so powerful that it may force us to miss the opportunity; however, trading with confirmations is safer practice. There are ways to look at trading before the break, but we will look at that another time.
Typically when we are looking at expectations surrounding how far the break out will take us, we are looking to claim a move equal to the widest part of the triangle. This gives us an approximation of our take profit levels, and we can calculate our stop loss by halving it, ensuring that it is sensible in its placement.
In addition to the triangle formations bullish or bearish indication, we can also assess the candlestick behaviour within it for pressure favouring the up or downside. This will add to our clues about where the break will likely to occur.
I hope you have enjoyed our educational session today ladies and gentlemen, please take some time to analyse your charts for the study of triangle formations, contemplate what you have learned here today and remember contemplation is the key to learning.