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Trading the Symmetrical Triangle

October 3, 2016 by Lior Alkalay 2 Comments

I always like to say, that in any trading strategy, you should only be exposed to the market when absolutely necessary. That is, whether it’s a strategy running on daily intervals or on monthly intervals, a trader should not stay in the market longer than needed because it leaves room for the unexpected.  This is especially true when it comes to momentum strategies and it can be the difference between gain and pain.  The Symmetrical Triangle strategy is one that is simple and effective enough to let you gain from momentum, without staying a second longer than necessary. The strategy relies on a pattern that, no surprise, is called the Symmetrical Triangle.

Symmetrical Triangle Pattern

So what is the symmetrical triangle pattern? Simply put, it is a pattern that enables you to buy into a correction and sell before the pair peaks again.

In order to identify a symmetrical triangle pattern, we have to watch for four unique yet symbiotic conditions.

  • The pair has to be in a long term bullish trend.
  • The pair has to be in the midst of a temporary correction.
  • The correction has to be in the shape of a triangle with lower highs.
  • The momentum of the correction has to converge with the oscillator, as seen in the MACD chart below.

Symmetrical Triangle

The buy signal comes at a very specific time. That is after the pair breaks the correction pattern and oscillator (in this case, the MACD) moves back above zero and ascends into buy territory.

The symmetry of the triangle is what helps us determine our limit. The symmetry does not have to come in the shape of a symmetrical triangle on the upward move. In fact, only one element should be symmetrical—the highs. The highs from where the pair breaks the correction pattern (see point A) should be identical to the highs of the triangle.

Using the grid to measure the height, if the height of our triangle is three and a half squares we should stretch point A three and a half squares to point B.

The Idea Behind the Strategy

So what is the idea behind the Symmetrical Triangle?

To get the answer, we need to start with the end result.

The chart shows that the pair has continued above point B (which was our target), yet the symmetry rule made us exit the trade early. Why? The idea is that when you have a triangle break that fulfilled the aforementioned conditions it tends to generate a move higher, at least the same height as the triangle from the point of the break. If, for example, the bullish trend would have been over, the pair would have topped out a little above point B. But if we were targeting G, a higher point, and stayed too long, we could have ended up with pain rather than gain. But the symmetry method allows us to take a profit even if the pair was about to top out and reverse.

When we add the entry methodology that allowed us to enter the trade early with minimal risk the picture become clear. The symmetrical triangle is an “in and out quick” strategy that minimizes risk in both directions. The entry is right at the bottom of the correction and the exit point is distant enough to make it a worthwhile trade and quick enough to avoid a potential trend reversal.

Before You Start

Of course, as with any strategy, including the Symmetrical Triangle, there is no singular perfect strategy that can always guarantee profit. The major downside to the Symmetrical Triangle strategy is that the pattern does not occur every time. For example, in the waves that followed we can see there were no lower tops when the pair corrected, just a steep descent towards the support line. That means that the Symmetrical Triangle is a low frequency strategy—it provides an entry signal only every once in a while.

Naturally, that means you cannot rely on this strategy alone for profits because it may take time between each opportunity. But, when balanced with other strategies, the Symmetrical Triangle can certainly spice up your results and allow you to improve your trading performance each time it produces a burst of momentum.

Filed Under: Uncategorized Tagged With: MACD, oscillator, pattern

Cup with Handle Chart Pattern

November 23, 2015 by Lior Alkalay 5 Comments

When I first time heard about the Cup with Handle chart pattern I was certain some coffee junkie had coined the name. I expected it to be some quick kind of trade you made first thing in the morning. You know, while you sipped your first cup of Joe. But to my surprise it’s got nothing to do with coffee, or even morning, for that matter.

The Cup with Handle chart pattern is rather popular among swing traders. Now, it does require a lot more patience than many other patterns. But, if you get it right, it’s worth your while.

Cup with Handle: Some Background

Cup with Handle is a chart pattern that, to my knowledge, was developed by William J. O’Neil in the 1980s. The pattern is explained extensively in his book, How to Make Money in Stocks, which I personally recommend.

The cup with handle is essentially a pattern that, as you’ve no doubt guessed, looks a lot like a cup with a handle. The illustration below should help with the visual.

Cup with Handle

Generally, the cup with handle was designed to identify a buying momentum after hitting a bottom. Sort of an inflection point, for those of you that like math analogies. Once the pair bottoms out, it generates a U-shape pattern. That’s followed by a false attempt to break the high. Then, it falls back slightly to generate the handle shape.

The forming of the handle is your cue to buy. If the cup with handle pattern was identified correctly, it should be followed by a long upward trend. Does that sound confusing? It might be a little but it’s certainly nothing you can’t (pun intended) handle.

How to Trade a Cup with Handle

So how do we identify a real cup with handle? For that, several conditions must be fulfilled.

The first thing is that the bottom should be a U-shape. Don’t kid yourself that a V-shape is good enough. An actual U-shape is very important. That’s because a V-shape signals a very quick rebound which doesn’t usually shake off sellers. Thus, the cup with handle pattern could be a false one. The bottom line is that a long U-shape is critical for the pair to bottom out.

Next you need to watch volumes. One of the most important aspects of nailing the cup with handle is volume. Trading volume should dwindle during the decline and formation of the U-shape bottom. This signals that sellers and speculators are out.

Volume jumps up and then slides once again during the handle formation. When the pair makes that final break, volume should rise and stay high. That is the signal for high momentum.

The Moving Average is also something you should keep an eye on. Understand that there is no magic number as to which moving average to use. For weekly intervals, I prefer to have at least a 20 week moving average to capture the trend.

Overall, the decline precedes the bottom. And the bottom should be clearly under the average, as illustrated. Your buying cue comes after the handle that the pair/stock crosses above the moving average in tandem with rising volumes.

Below you can see what an actual cup with handle looks like. You can also see how we identified the buy signal. And, of course, the most interesting of all, what the upside looks like afterward.

Cup with Handle

Source: esignal

Things to Remember

Following a cup with handle can be very lucrative. But missing a false signal or failing to wait for the right one can cost you dearly. For example, take a look at the chart below. It’s a classic cup with handle, right? It looks like it… except that volumes didn’t rise in the bounce back nor did they in the breakthrough. Why? Because this was a false signal. The stock later collapsed, drowning those who had a long position with it.

That last example was really very telling as regards this pattern. It tells you should be patient for all the signals to confirm a cup with handle. Otherwise, your trade could end very badly.

Moreover, as you might have noticed, all the patterns we used are in weekly intervals. This is intentional; the cup with handle pattern tends to be the most effective in long term weekly trades.

If you’re trading a CFD of an index and miss the volume data, there’s no need to worry. You can use futures data to obtain volumes. Or you can watch volumes on an ETF that imitates the index, such as the S&P500 and the SPY ETF.

In conclusion, the cup with handle pattern can be highly lucrative. It’s very effective in identifying long term bullish trends. However, you need to be wary of the “false alarms.” Make sure you get an “all clear” before you jump in.

Cup with Handle

Source: esignal

Filed Under: Trading strategy ideas Tagged With: pattern, trend, William O'Neil

The Basics of Trading Triangle Patterns

January 25, 2015 by Richard Krivo 3 Comments

Triangle patterns form when price action oscillates between support and resistance levels and consolidates in the process.

On the historical 4 hour chart of the GBPJPY below, you can see how price begin to consolidate and “coil up” between support, the lower black line, and resistance, the upper black line. Think of it as a spring being compressed. Eventually, at some point, that spring (price action) is going to be released and a breakout will take place.

triangle chart

Entry Signal:

The candle labeled “entry candle” is currently just above the resistance line of our triangle pattern. If this candle closes above that resistance line, that will be our entry signal. If it does not, we will continue to bide our time for either a bullish or bearish breakout from the pattern.

Sidebar: A handy tool to use to know how long it will be before a candle closes is the “Show Time to End” indicator in the upper left hand corner of the chart. We can see that the current open candle will close in 3 hours, 9 minutes and 29 seconds.

(This tool can be added to any Marketscope chart by right clicking on the chart itself, select “Add Indicator”, scroll down to “Other”, select “Show Time to End” and then click OK.)

Stop Placement:

If the entry candle does in fact close above our resistance line, we could enter the trade long with a stop just below the support line in the area labeled “stop” in red. In the case of a downside breakout the stop would be placed above our resistance line.

triangle sign

Limit (Take Profit) Placement:

When you look at the far left side of the triangle where the pattern begins, you will see a green line with arrowheads at either end. In the case of any triangle pattern, that distance can be used to roughly determine the distance that price will travel after the breakout occurs.

The green line just to the right of the entry candle is the same length as the one discussed above. In the case of a bullish breakout we would place that line (or simply determine the number of pips it encompasses) as we see it on the chart and set our limit around the top of that line. (A more conservative trader might set the limit just below the top of the limit line to increase the likelihood that the limit would be triggered.)

In the case of a bearish breakout, we would reverse the above process and place the line below support at the point of the breakout.

Good trading,

Richard Krivo

RKrivoFX@gmail.com

Tweets by @RKrivoFX

Filed Under: Trading strategy ideas Tagged With: pattern, triangle

Pattern Trading

August 11, 2014 by Shaun Overton Leave a Comment

Ilan Azbel is a successful trader and the CEO of Autochartist, a research platform that automatically identifies technical analysis patterns like head and shoulders, rising wedges and many others. You probably already have free access to Autochartist – most forex brokers offer free subscriptions with your trading account.

Ilan was kind enough to share some of his insights on trading:

  • Are key levels really important in FX?
  • Is it realistic to make 20% annually?
  • What’s a safe amount of leverage?

Ilan Azbel pattern trading

Filed Under: Trading strategy ideas Tagged With: Autochartist, Ilan Azbel, pattern, technical analysis

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