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Trading a Triangle Breakout

Trading a Triangle Breakout

2014-07-01 19:00:00
Walker England, Forex Trading Instructor
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Talking Points:

  • The AUDUSD is trading in an ascending triangle
  • With the absence of a new high, traders can wait for a breakout
  • The triangle low and high can be used to extrapolate price targets

At some point, market trends will come to an end. These market transitions can be difficult for those that are used to using a directional market to make trading decisions. These market conditions don’t have to spell disaster for traders however. Those traders that can properly identify consolidating trading patterns will have a head start on adjusting their trading strategy accordingly. Today we will review trading one of the markets popular patterns, the ascending triangle. So let’s get started!

So, what exactly is an ascending triangle? An ascending triangle is a consolidating charting pattern, that can be identified by locating a currency pairs support and resistance levels. Below we can see what is known as an ascending triangle forming on the AUDUSD 4Hour chart. Resistance in this instance is seen as a horizontal line created due to the absence of a new high. At the same time, a line of support can be seen ascending as our lows increase in value. As price pressure builds in the triangle, traders can then begin to consider trading in anticipation of a market breakout.

Learn Forex –AUDUSD Ascending Triangle

Trading a Triangle Breakout

(Created using FXCM’s Marketscope 2.0 charts)

Breakouts Using Entry Orders

Once a triangle pattern is found, we can then begin setting orders in preparation for a breakout. By using an entry order, a buy order can be placed over resistance in anticipation of the market moving through this value. The order will remain pending, and in the event that the market breaks through this selected point, an order to buy the AUDUSD will be triggered. Conversely, if price does not break resistance or price continues to consolidate, the order will not execute. In these instances, traders will have the option of deleting the order, and then proceeding to look for other market opportunities.

Learn Forex – AUDUSD Triangle Breakout

Trading a Triangle Breakout

Created using FXCM’s Marketscope 2.0 charts)

Managing Risk

Lastly, traders need to find a profit target and manage risk. Traditionally, most traders look to use a 1:2 Risk/Reward ratio or better when trading breakouts. This can be extrapolated by looking for twice as many pips in profit as we are risking with our stop. One useful tip is to extrapolate a profit target from the triangle. Traders can measure the distance from the bottom support mark to the top of current resistance. This value can then be added to the point of the breakout to develop a profit target.

To practice setting up entry orders for price breakouts and trading triangles, register for a Free Forex Demo with FXCM. This way you can develop your trading skills while tracking the market in real time!

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.

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