Pattern day or swing trading is a very effective tool forex traders could include in their arsenal of trading setups. There is even a well-known trading guru who used pattern day-trading to turn his $ 200 to more than a hundred grand in a span of a few months. Well, he might have been lucky. But still, if you could gain 20%, 30%, even a 100% on your trading account, that’s not bad at all.
The good thing about pattern trading is that it applies to all timeframes, from M1, M5, M15, H1, H4, up to the Daily timeframe, and to all types of trading, whether it be scalping, day trading, or swing trading. You could either choose to specialize on a specific timeframe and pattern or you could also monitor all timeframes and look for several patterns. Either way, pattern trading, coupled with a good money management system, is profitable.
One of the most popular, and commonly seen pattern is the Triangle Pattern. It is a pattern that shows how traders’ excitement and trading activity starts strong then gradually dissipates and dies out before the market decides as to where price should be going. Basically, the triangle pattern is a type of market contraction. And market contractions are like spring coils, it bounces off after a contraction. It is the calm before the storm.
Understanding The Triangle Patterns
Triangle patterns are often characterized by a strong market movement as soon as price breaks out of the pattern. And where there is activity in the market, there is money to be made.
As with all other breakout strategies, the signal candle is the candle that breaks out of the support or resistance. The breakout candle should strongly close beyond the support or resistance. It shouldn’t be a slight peak below the support or above the resistance, and it definitely shouldn’t be just the wick that goes beyond the support or resistance. A slight peak beyond the support or resistance usually signifies that the market isn’t strongly convinced it wants to be bullish or bearish, and often it reverses, nullifying the setup. To get around this, we should be patient enough to wait for the candle to close. Going to the lower timeframes to jump the gun earlier also isn’t wise. In trading, patience is important.
The Stop Loss
There are three different places we could hang our stop loss on.
One is based on the breakout candle. With this, we would be putting our stop loss just a few pips above the breakout candle. This is ideal for traders who are a little bit more aggressive and would want to have a better risk-reward ratio.
The second is based on the opposite trendline. If the setup is bullish, the stop loss would be below the support. If the setup is bearish, like our chart, the stop loss would be above the resistance. Conservative traders could use this and could assume that the chances of having their stop loss hit is very slim. The disadvantage though would be that since the stop loss is quite wide, we could expect that the risk-reward ratio may not be that big.
Another option would be based on the apex of the triangle. With this type of setup, we could place our stop loss just a few pips above the price on the apex of the triangle.
In this chart, coincidentally, the apex of the triangle is also at the same area as the high of the breakout candle. But this is not always the case. Often, the high of the signal candle is below the apex of the triangle.
It is up to you to choose which among the three types of stop loss you are most comfortable with. Basing the stop loss on the opposite trendline is the most conservative but the risk-reward isn’t that appealing. Depending on the length of the breakout candle, usually, basing the stop loss on the breakout candle could yield the highest risk-reward ratio, but is a little bit more aggressive, since the distance of the entry price and the stop loss would a bit smaller. Using the apex of the triangle could also be a good option, since it could balance out the distance of the entry price and the stop loss, as well as the risk-reward ratio.
The Take Profit
Many advocates using the size of the initial move of the triangle as the take profit, but this target take profit is often too far off.
An alternative to this would be to use either the bottom of the widest part of the triangle as a target, for bearish setups, or to use the top, for bullish setups.
Since the bottom of the widest part of the triangle is also considered as the lowest-low, it naturally acts as a horizontal support, and thus there is a possibility for price to bounce off as it approaches this level, and based on the chart, it did bounce off.
For aggressive traders, the length of the initial thrust could be used as the measuring stick for a second take profit target.
This allows for a far better risk reward ratio, however, since it is too far off from the entry price, there is a high chance that this take profit would not be reached.
Triangle patterns setups, are simple and effective. With a trained eye, it would be easy to identify such setups, which do occur often in any market. It also allows the trader to cash in on big moves, since the triangle pattern is a form of a contraction, and contractions often precede big moves. The disadvantage though would be that it is an indecisive pattern, so no bias could be made as to the direction of price. All we could do is to let the setup tell us where it wants to go. Still, if you master the triangle pattern setup, you could make lots of profits coming from these setups. Trade wisely.