Triangle Chart Pattern Forex Strategy

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Video Transcription

Hey, traders. Welcome to Video 10 in the advanced Forex strategies course. This is Cory Mitchell. In this video, we’re looking at the triangle chart pattern strategy. We can use this strategy on all time frames, brought to you by investoo.com. So, trend trading is where the money is. Triangle breakouts provide a way to participate in the next wave of a trend. As always, our risk is going to be lower than our potential reward, and as mentioned, we’re going to see triangles on all timeframes. So, we trade in the direction of the trend, which is the direction of the triangle breakout. Triangles are called a continuation pattern since they slightly more often than not break in the direction of the prevailing trend. So, if we have the price moving higher, then we will have a triangle type pattern. About 55, 60% of the time, we’re going to break higher, but we don’t need to make that assumption. A breakout in the opposite direction is also tradable. With this strategy, we can set and forget. We can set our order outside the triangle. We can set out stops, set our targets, and we just let math do the work. As indicated, our profits are always bigger than our losses, so even if we’re right 45, 50% of the time, we’re still going to have a winning strategy. A triangle is characterized by narrowing price action, and we need at least two swing highs or swing lows to connect. So, what that basically means is that we’re having these swings back and forth that are getting smaller and smaller back and forth, basically forming a triangle-like appearance when we draw lines with them. The narrower the price action becomes, the better the opportunity because our risk is lower and there is a greater possibility that a sharp move will develop shortly. Markets do not do nothing for very long. So, as they narrow into what we call the apex of the triangle when the price action gets very compacted, it acts like a spring. So, we’re expecting a big move. When the price moves above the confines of the lines of our triangle, we enter long. We place a stop just below the pattern. The height of the pattern at the widest is what determines our target, so we take the widest part and add it to the breakout point. Don’t use extremes in price when you’re getting this target. It’s better to get out with a profit than to miss a target that is too aggressive by a couple of pips. I’m going to show you exactly what I mean when we look at a couple of examples. Profits should be at least 1.5 times the risk, but preferably we want two or more times. Risk must be kept below 1% with this type of strategy. We’re just taking one entry, one exit, and one profit target. When the price moves below the confines of the lines or the triangle, we enter short. We place the stop just above the pattern. The target is the height of the pattern as the widest parts extracted from the breakout point, because we’re going down this time. We don’t use extremes of price, once again, to establish that target. We’d rather get out than be too aggressive, and profit, once again, should be 1.5 to 2 times the risk or more. Once again, we just have the one entry exit and stop so on that position, risk should be capped below 1%. So, let’s look at downside breakout first. So, in this case, it is a continuation pattern. We’re looking at the AUD/USD one-hour chart. We can see the price is moving down, narrows here a bit, gets a bit wider, but then we have this narrowing pattern again. So, we need at least two swings in order to even create these lines, which we get here. So, we have the first swing we’re at the start, and then we notice we have two swings that are quite a bit narrower than the last two. So, we have this compacted price action where the price is narrowing, and once we’ve drawn those lines, we notice we get a major trend line break of that. So, it breaks below this trend line here, which signals our entry into a short position. So, we are entering here, so our stop goes on the corresponding bar of the breakout, so our stop would be just above the pattern right near our breakout point or above our breakout point. So, don’t make the mistake of saying, “Oh, our stop goes above the pattern.” and putting it way up here. That’s too much risk. We can put it right down here. Since it’s broken to the downside, we expect that to continue. If it comes back here, we don’t know what’s going to happen, so we’re going to get stopped out, and that’s fine. We’re going to put that right above the pattern for a downside breakout. So, the stop always goes outside the pattern, opposite side of the breakout. So, there we can see we’d be entering short right about here just below the pattern. We can see what our risk is. So, we are looking at about 13 pips of risk there. You can see 129. That means 12.9 pips on my little measuring tool there, so 13 pips. As for our target, and let’s just mark our entries. So, our entry would be just below the pattern there. Let’s mark that as green for our entry. Okay. So, there we can see entry, stop and now we need our target. As I mentioned, I normally just use this. You can go through and actually do the math if you want, but I find this as easy visually to see where your target would be. So, we have a couple of extremes in here, which I do not like. I generally do not use those. But here, we have a level that the market has reached quite a few times. So, we will use this as our low, and we have this here, another spike. We want to take areas where the market hits, so we can see the price did reach this area a couple of times and also this area. So, we’re more inclined to use this area here than this extreme level. So, as we can see, the height of my target is quite a bit less than the actual. That won’t always be the case, but just when you have these extreme bars simply because the market didn’t reach those and stay there for very long, we can’t really consider them relevant levels. So, there, I have my target. The first thing I want to check is based on my entry point is my profit bigger than my risk? And we can see just by lining that up there that my reward is quite bigger than the risk that I have here, so that’s a good thing. So, we can go ahead and set our target. So, based on our entry point there, I think we’d be looking at a target down here. So, there you can see, we’re looking at about a two to one reward risk to ratio here, which is pretty typical. A little less than two to one. We had 13 pips of risk and about 25 pips of profit. So, that’s a good trade. Other times, we would have had quite a bit more. Say if these had hung around at these levels, then we could have used that whole width of the triangle and then we would have had about a three to one or so. So, let’s look at another. This is a bigger one. Here, once again, it ends up being a continuation pattern. Overall, we have some choppy action here. The price goes into this triangle. You can see narrowing price action, quite a big news-related move in here. So, these basically create our middle points for connecting or our second swings. Then we have a third swing, so our top connects, bottom connects, bounces off of it here, and then we have this rally up through the upper trend line. So, once again, entry will be just above the pattern right there, so as soon as it breaks out, remember we don’t wait for bars to complete. I should point that out again on all of these strategies. No reason to let a bar complete. We don’t want to be entering up here when we can enter down here. Stop and go is just below the pattern at the breakout point on the opposite side. We’ll color that red. So, there is stop. There is our entry, so now we need to establish our target price. So, here, we can see a little bit of an extreme here. I don’t want to use that. This area is a little more condensed, so we’d rather use this area here. This extreme only hit once. We don’t want to use that, but this area here was hit on multiple bars, traded through quite a bit, so it is a significant area, so we can use that one. So, as you can see, this target is pretty close to the height of the pattern. We knocked off a little bit, so we’re being a little conservative which is always my preferred choice. I would rather get out of a trade than be too aggressive and have it run all the way to my target, and then miss it by a few pips. So, we add this to our breakout point, and we can get our target. So, there is our target, and we can do a quick visual check to see if our target is bigger than our loss, and we can see that it is. We’re looking at about a two to one, and we can just confirm that entry point to stop. You’re looking at, rounded to about 33 pips and to our target, 66 pips, so exactly two to one, which is the kind of trades we’re looking for. Once again, we will see triangle patterns where we’ll make about 1.5 to 1 for profit to risk. If we’re below that, we probably don’t want to trade the pattern. And occasionally, we’ll have large triangles that really narrow down to a point, and in those cases we may sometimes get three or four times our risk on our profit. So, those are the ones that we really like to see. So, we will review. Every trade has a stop and target. Put those orders out when you place the trade. Risk 1% or less of your account in one Forex pair or trade. In this case, we’re only taking the one entry at the breakout point, so risk should be pretty simple to calculate. That way even a string of losses won’t significantly draw down your account. We trade in the direction of the breakout. We place a stop just on the pattern on the opposite side of the breakout. The target is the height of the pattern. For an upside breakout, we add the height of the pattern to the breakout price. For a downside breakout, subtract the height of the pattern from the breakout price. Be conservative here. Do not use the extremes in price. We would rather get out with the profit than miss our target by a couple of pips because we’re too aggressive. Trading involves a substantial risk of loss. Only trade with capital that you can afford to lose. Test out strategies before using them to make sure you’re actually able to use them and make them work for you. Chart patterns are subjective since the breakout point is determined by the trend lines. How you draw those trend lines will determine your breakout price, where your stops go, where your targets are. So, this is a little bit of-we won’t call it an art, but it does take a little bit of skill to be able to get use to drawing these patterns so that your targets actually get hit, and you’re not getting to many false breakouts. So, it will require some practice on your part. Until next time, happy trading.

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