A contracting triangle is a pattern that forms in a chart when the security price is consolidating. The consolidation takes the form of a series of lower highs and higher lows, with the trend lines converging as the buyers and sellers battle for control.
When trading contracting triangles, there are three key things to look for:
The breakout direction
The breakout direction is how the price breaks out of the triangle. This can be either upwards or downwards, and it’s essential to wait for this breakout before taking any trades.
The breakout level
The breakout level is when the price breaks out of the triangle. It could be the price at which the breakout occurs, or it could be a level above or below.
The stop loss placement
The stop loss placement is where you place your stop loss to protect yourself from any significant moves against your trade. It’s important to stay disciplined when placing your stops, and we’ll discuss this in more detail later on.
When trading contracting triangles, it is almost always best to wait for the breach of the upper trendline before taking any trades.
Contracting Triangle waiting for a break of upper trendlines If there is no clearly defined upper trendline, you should wait for the breach of resistance before entering into a long position or waiting for support before entering into a short post. The reason for this is that the security is in a more uncertain place when the trendlines are not well-defined, and it’s, therefore, riskier to take a trade.
Once the breakout has occurred, we can enter into a trade in the breakout direction. You should place the stop loss just below the lower trendline to prevent any sudden downside moves.
Contracting triangle with quick entry taken after a gap of lower trendline: you should place the stop loss just above the upper trendline to protect yourself from any sudden upside moves.
It’s important to remember that contracting triangles can stay in play for a while before breaking out, so it’s crucial to wait for a clear breakout before taking any trades.
When trading these patterns, it’s also essential to use tight stop losses, as even a tiny move in the wrong direction can result in significant losses.
So, that’s a quick overview of what contracting triangles are and how to trade them. In the next section, we’ll discuss some tips for changing these patterns successfully.
Tips for Trading Contracting Triangles
- Wait for a clear breakout before taking any trades.
- Use tight stop losses when trading these patterns.
- Stay disciplined when placing your stops.
- Trade in the direction of the breakout.
- Take profits when the price reaches resistance or support levels
- Don’t over-trade! These patterns can be pretty risky, so it’s essential to take trades with a high probability of success.
- Use technical analysis tools such as trendlines, moving averages and RSI to help you spot contracting triangles.
Fun Facts on Trading Contracting Triangles
- Contracting triangles are one of the most common formations in trading.
- The formation is considered a bullish sign found in an uptrend and a bearish sign in a downtrend.
- The breakout from the triangle is often preceded by a significant move in the opposite direction, confirming the validity of the formation.
- The triangle’s height is usually used to measure how strong the expected breakout will be.
- The breakout from a contracting triangle can occur in any direction, making it particularly tricky to trade.
So, those are some tips for trading contracting triangles. As with any other trading strategy, it’s important to practice patience and discipline when trading these patterns.
There’s no need to rush into any trades, as it’s always best to wait for a clear breakout before entering into a transaction.
Stay disciplined with your stop losses and only take businesses with a high probability of success. And most importantly, have fun and enjoy. Follow Saxo for more forex information.