![]() Figure 5 on the other hand, shows the anticipation strategy in action.įalse breakouts are the main problem traders face when trading triangles, or any other chart pattern. The trade shown in figure 4 would not work for an anticipation strategy, since the price broke higher before coming back to touch the recently drawn support line. Therefore, to establish the potential support and resistance levels, and take a trade at one of them, the price must touch the level at least three times. The first two price swings are only used to actually draw the triangle. This is because it is on the third (or later) touch of support or resistance that the trader can generally take a trade-peaks and troughs generally run in series of three. To use the anticipation strategy a triangle needs to touch the support and/or resistance level at least three times. ![]() By going short near the top of the triangle, the trader gets a much better price than if they waited for the downside breakout. If a trader thinks the price will eventually break below the triangle, then they can short sell near resistance and place a stop-loss just above the triangle. Upsides are the upswings in prices, while downsides are the downswings. Because of the lower entry point, the trader who anticipates stands to make much more than the trader who waited for the breakout. If the price does break out to the upside the same target method can be used as the breakout method discussed above. Placing a stop-loss just below the triangle reduces the amount of risk on the trade. This creates a lower entry point for the trade by purchasing near the bottom of the triangle the trader also gets a much better price. In this case, they can buy near triangle support (the bottom of the low), instead of waiting for the breakout. By assuming that the triangle will hold, and anticipating the future breakout direction, traders can often find trades with very big reward potential relative to the risk.įor instance, suppose a triangle forms and a trader believes that the price will eventually break out to the upside. More advanced forms of the breakout strategy are to anticipate that the triangle will hold and to anticipate the eventual breakout direction. ![]() Traders may wish to add additional criteria to their exit plan, such as exiting a trade if the price starts trending against their position. The problem is that sometimes the trade may show a nice profit, but not reach the profit target. Eventually, the price will reach either the stop-loss or profit target. Profit targets are the simplest approach for exiting a profitable trade, since the trader does nothing once the trade is underway. For example, if the triangle was $1 in height at its thickest point (left side), then place a profit target $1 above the breakout point if long, or $1 below the breakout point if short. One option is to place a profit target at a price that will capture a price move equal to the entire height of the triangle. A profit target is an offsetting order placed at a pre-determined price. To exit a profitable trade, consider using a profit target. It helps to have exit strategies in place when purchasing, so you can sell when it is the right time based on your criteria. If the price breaks above triangle resistance (upper trendline), then a long trade is initiated with a stop-loss order placed below a recent swing low, or just below triangle support (lower trendline). ![]() If the price breaks below triangle support (lower trendline), then a short trade is initiated with a stop-loss order placed above a recent swing high, or just above triangle resistance (upper trendline). The objective of the breakout strategy is to capture profit as prices move away from the trendlines forming the triangle. To help isolate when the price is breaking out of the support or resistance levels, observing an increase in volume can help highlight when the price is starting to gain momentum towards a breakout. Since each trader may draw their trendlines slightly differently, the exact entry point may vary between traders. These breakouts are used as indicators of opportunities for traders. Breakout refers to a market situation where prices move above resistance levels or below support levels. ![]()
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