PLAYING WITH TRIANGLES

By Alexander O’Malley
Trading is never filled with certainties. There is
INDICATOR REVISION
UP SLOPING TRIANGLES
no way as a trader we can be 100% sure how price is
The up sloping triangle is formed going to react the next day. All we can do is apply our
when a horizontal resistance line is analysis and be ready to jump onto an opportunity
intersected by a rising trend line. Pricewhen it presents itself, and this may mean that we need
rise to the resistance level, where to develop more than one trading plan when looking at
sustained selling forces the price an opportunity.
back. Buyers can bid less and still pick This chart has developed into an upward
up stock. However, on each pullback, sloping triangle pattern. This pattern is a very bullish
the fall is reduced. Buyers have to bid pattern with a high probability of success. A triangle
slightly higher to get the stock. This pattern develops during an uptrend when price rally’s or
creates the rising trend line as each
new low is higher than the previous
rebounds rapidly towards a resistance level. This move
one. When there are no more sellers is generally three to five trading days. This is the first
at the resistance level buyers have to side or base of the triangle, the resistance level is the
bid higher to get stock. Often this second. As price reaches this level the sellers come
means bidding substantially higher into the market and take profits causing the price to
and the breakout takes place. This is drop. However the buyers still believe this stock is
a strong chart pattern and breakouts worth getting into and start buying more, stopping the
from the last third of the triangle can price fall. This repeats but as time goes by the buyers
be very powerful. become more and more buyers come into the market
and price does not fall as far each time as it retraces off
the resistance level. This creates a trendline and the third side of the triangle.

The main advantage that a triangle pattern gives traders is a projected price target. By
measuring the base of the triangle and projecting this up from the breakout point on the
resistance level we have our price target. A triangle patterns will hit the projected price target
80% of the time. If a triangle pattern fails we can take the measurement of the base of the
triangle and project this downwards. This is the downside price target.

Generally traders find triangle patterns during their development stage while doing an
eyeball search. There are no searches that will accurately find developing triangle patterns.
Because traders find triangle patterns in their development stage this presents a trading plan
problem.

When we found this opportunity there were two entry points. The first is an aggressive
entry as price falls back towards the trendline and rebounds. The second is if price breaks the
resistance level the next day. It is important as traders to have the flexibility to plan for two
scenarios when looking at a trading opportunity like this.

The trade plan looks like this.

Entry: 0.24-0.25 (0.26-0.27)

Stop Loss: 0.235 (0.255)
Target 0.32
RR: 7.5 (5.5)
 Our aggressive entry is set for when price falls back and rebounds off the trendline
between $0.24 and $0.25. Our stop loss is set as a close below the trendline at $0.235. Once a
chart pattern is invalidated traders need to get out of the trade and step back from it. When
chart patterns fail they have a tendency to fail badly.

Our second entry condition is if price breaks above the resistance level at $0.26. Our
entry area is between $0.26 and $0.27. In this condition out stop loss is a close below the
resistance level at $0.255. Even though there is a possibility that price will only fall as far as the
trendline and rebound we do not know if the trendline will hold after price as already broken the
resistance level. Therefore it is safer to take a small loss initially and reenter into this pattern as
price rebounds off the trendline. If traders do this they need to be very careful and have a tight
stop loss as a failed breakout shows lack of confidence in the pattern.

The target for each entry condition is the same. In each condition we measure the base
of the triangle and project this up from the resistance level giving us a target of $0.335. Looking
at the chart however we can see $0.32 is the highest price. Even though the projected target of
this triangle pattern is above this point, this creates a strong psychological barrier that price
needs to overcome. Traders need to watch carefully as price reaches this area and be prepared
to capture profits.

A feature of triangle patterns after they have broken is they can retreat and retest their
resistance/support level before continuing onto their projected price target. If traders had
entered at the first entry condition this causes no problem as they are still in profit, traders who
entered in condition two however need to mindful of this price behaviour. Some traders prefer to
wait for the pullback and enter off the rebound. This is a safer entry, however if price does not
pull back then they miss the trade. Traders should use the approach that best suits their trading
and risk management style.

The triangle broke above the resistance level of $0.26 the following day. Entry condition
two was used and we entered at $0.265 buying 75,500 shares, spending $20,008 with a stop
loss of $0.255 putting $755.00 or 0.075% at risk.

During the day price rose to $0.285 before finishing the day at $0.28 putting this trade
immediately into a 5.56%. We now watch closely to see whether the rise will continue in the
coming days or if price will retest the $0.26 support/resistance level before continuing onto the
projected price target of $0.33.

Being able to react to price behaviour is an important skill that all traders need to learn to
be profitable. If traders are unable to adjust to changes in price behaviour they will soon find
themselves out of the game.