Triangle chart patterns are the most traded chart pattern in currency trading. There are three types of triangles most traded in currency trading:
Triangle Chart Patterns
•symmetrical triangles
•ascending triangles
•descending triangles
Triangle Chart Patterns are Easy to Identify on Forex Charts
Identifying triangle chart patterns is easy when a complete technical analysis has been carried out. Locate 2 higher highs and 2 lower lows. Next, draw a line through them. Join at least 2 lower lows with one line, and 2 higher highs with another line, and you’ll have a nice triangle chart pattern. You have just identified a trade-able chart patterns most traded in forex trading. A minimum of four ‘bounces’ should be observed before this triangle formation can be considered a reliable pattern to trade with.
Research by Thomas Bulkowski and many famous technicians indicate that price often breaks out of the symmetrical triangle ahead of the price at which the 2 trendlines converge, which is labelled the apex. From the point where the triangle begins, research shows that most triangles break out of either the upper or lower trendline anywhere from the 66 percent and 75 percent of the way to the apex, though some triangles break out at the apex.
An important Caveat on Directional Biases
There is one major caveat to know when working with triangle chart patterns. In most technical analysis books, it is found that ascending triangles are described as bullish continuation patterns and descending triangles are described as bearish continuation patterns. From our experience, if you classify triangle chart patterns as such, you are doing a disservice to yourself.
Ultimately, we should not try to predict which direction price will break from triangle chart patterns. That’s not to say that ascending triangles cannot meet their upside breakout targets or that descending triangles will not break to the downside targets. They do.
However, when thinking of these triangle chart patterns in terms of risk/reward and edge, it’s best to treat them without directional bias and take advantage of the principle of range expansion following range contraction instead of the complexity of trying to predict which direction price will break-out.
In fact, you will likely find that some of the best trades will come from triangle chart patterns that break opposite of their expected directional bias. This is because traders who think that ascending triangles will -always break to the upside will be forced to sell their forex contracts as they stop-out when the ascending triangle breaks unexpectedly to the downside, and these traders stoping out, when combined with sellers entering new short-sale positions as a result of the confirmed triangle chart pattern entry will create a positive feedback loop that propels price to achieve the unexpected downside target. Knowing this is a major benefit when anticipating where or how to enter a potential triangle trade.
As such, we should use trendline-break EA found on MT4 to draw not just a buy pending order on a ascending triangle chart pattern, but also sell a pending order on the chart pattern as well. When breakout happens either to the upside or downside, the trader can participate on the breakout regardless of its direction. This process of placing buy and sell pending orders on triangle chart patterns can now be automated by commercialized software or robots.
In regard to where are best to enter trades in triangle chart patterns, we turn back to conservative versus aggressive tactics. An aggressive trader would put on a position immediately as price begins to break above the upper trendline or beneath the lower trendline without waiting for further confirmation signal. Conservative traders have a variety of entry strategies, including entering only as price breaks above a strong bullish breakout candle like a bullish engulfing or beneath a strong bearish candle.
Thanks to technology, there are commercialized robots programmed specially for traders to trade triangle chart patterns on automation. Whether the trader trades aggressively or conservatively, entry based on trendline-breakout or price breaks and closes beyond trend line, each of these style of trading can be personalized and programmed to work in the absence of the trader at the computer screen.
Reducing False Breakouts Trading Triangle Chart Patterns
A time filter can be introduced to reduce the possibility of false triangle break-outs outside the specified trading time frame. Generally, most genuine breakouts happen during active Forex trading hours and 30 minutes after the opening bell of the market session.
Another way is to introduce indicators like ADX and to factor in the ADX values before considering whether to trade breakouts or to fade breakouts. Reducing the likelihood of the false breakout, I will like to see that the ADX is below 15 value for some time. And the longer it stays below 15, it will mean that market is attempting and preparing for a big movement. It will be a very good opportunity to trade triangle chart patterns.