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Introduction to the Stock Market_8. Chart patterns_ Symmetrical triangles trading strategy

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Published by yaniv, 2022-06-09 08:21:08

Introduction to the Stock Market_8. Chart patterns_ Symmetrical triangles trading strategy

Introduction to the Stock Market_8. Chart patterns_ Symmetrical triangles trading strategy

Lesson 8: Chart patterns. Symmetrical triangles trading
strategy

Symmetrical Triangle Risk Analysis (Stop Loss)
Since we know how to distinguish the real breakout from the fake breakout and we
already know our symmetrical triangle target, it is time to discuss the risks of the
trade.
You should always know the amount you are willing to risk before placing any trade.
If sometimes you need to risk more than you set into your trading plan, simply do not
take the trade and move forward to a better one. It acts the same way with the
symmetrical triangle stock pattern.
The proper location of a stop loss when trading symmetrical triangles is below the
opposite side of the breakout.
However, this level is inclined, right? The more you move the stop to the left, the
bigger the distance is between the stop and the entry price.
So, where should we place the stop? Here you need to apply some simple price
action rules. Have a look at the price action in the symmetrical triangle. If the real
breakout is bullish, place the stop below the lower level of the triangle, under a
bigger price bottom. If the breakout is bearish, place the stop loss above the upper
level of the triangle.
At the same time, try to pursue a win-loss ratio of at least 2:1. Have a look at this
image which will explain to you where to place your stop when you trade symmetrical
triangle patterns:

This is the same 2-minute chart of Citigroup. This time, I have included two stop loss
points on the chart. Notice the two black arrows below the lower level of the triangle.
They identify the last two bottoms, which are part of the support line of the
symmetrical triangle. These two levels are great points to place your stop loss.

Our minimum profit target is $0.46 above the entry price, which is a 1.04% target.
The first stop loss is 0.28% below the entry price and the second stop loss is 0.45%
below the entry price. If you choose stop loss (1) you will get the following win-loss
ratio:

1.04 : 0.28 = 1.04 / 0.28 : 0.28 / 0.28 = 3.71 : 1 win-loss ratio

This fulfills our 2:1 minimum win-loss ratio. If you choose the second stop loss order,
you will get the following win-loss ratio:

1.04 : 0.45 = 1.04 / 0.45 : 0.45 / 0.45 = 3.22 : 1 win-loss ratio

I will recommend you to use the second stop loss alternative in this case. The reason
for this is that it is more secure and it still fulfills the 2:1 win-loss requirement of a
good trade.

How to trade symmetrical triangles

Now we will combine all the information we discussed above into a profitable
symmetrical triangle trading strategy. We will enter the market on a real symmetrical
triangle breakout, placing a stop beyond the opposite side of the triangle.

We will hold the trade until the price moves with a size equal to the size of the
triangle. After this target is completed, we will close 50% of the trade. If the trend
continues, we will hold the other 50% until the price breaks another swing point on
the chart.

I know all this sounds a bit confusing, so have a look at the image below which
illustrates this strategy.

Symmetrical Triangle Trade Example

Above you see the 10-minute chart of Boeing from Apr 5 – 6, 2016. The image
displays a symmetrical triangle with a downside target.

The blue lines frame the scope of the triangle. The red line is an extension of the
lower level, which help us to place the minimum target on the chart. The two black
arrows identify two relatively larger volume bars.
The second big bar matches with the bearish breakout of the symmetrical triangle.
Therefore, we assume that the breakout is genuine and we short Boeing based on
our symmetrical triangle trading strategy.

The best place for a stop loss order is as shown on the image above. This is the
place above the third top of the triangle, above the upper level. This way we have a
1.09% target while risking 0.47%. Let’s now calculate the win-loss ratio:

1.09 : 0.47 = 1.09 / 0.47 : 0.47 / 0.47 = 2.32 : 1 win-loss ratio.

With the target and the risk identified, we take in this trade we manage to attain 2.32
: 1 win-loss ratio. This fulfills the 2:1 minimum, which makes the trade potentially
favorable. After a 30-minute consolidation, Boeing’s stock price begins decreasing.
Eight periods after the price starts decreasing, Boeing hits our minimum target
accounting for a total decrease of 1.09%. Since our minimum target is accomplished
we close 50% of the trade.

Now we have the other half of the trade open in order to catch a potential
continuation of the bearish trend. However, with the next candle, the BA price closes
a dark cloud cover candle pattern, which is shown in the blue square on the chart.
This candlestick pattern has a strong reversal potential.

Based on the development of this reversal pattern, we close the other 50% of the
trade.
Let’s calculate the profit results now:

We catch 1.09% with the first half of the trade, which we close after the minimum
target reach. This means that the first part of the trade brings profit equal to:
1.09% / 2 = 0.60%

Now let’s calculate the second half of the trade. We don’t manage to catch a further
price decrease and we realize a safe exit based on the dark cloud cover pattern.
This way we avoid the bullish force which comes right after we close the trade.

The total price move during the second half of the trade equals to 0.89%. However,
this is still only half of the trade. For this reason, we divide this percentage by two.
0.89% / 2 = 0.45%

So, the total profit from the trade equals to 0.60% + 0.45% = 1.05%.

Conclusion

- The symmetrical triangle is a chart pattern, where a horizontal line through
the rightmost edge divides the angle into equal degrees.

- The breakout direction of the symmetrical triangle is unknown. For this
reason, we should be able to distinguish a real breakout from a fake breakout.

- A great way to identify the real breakout is to use a volume indicator. Real
breakouts usually appear during high trading volumes. When the breakout
happens during low volumes, the move will likely not hold and reverse.

- The minimum target of every symmetrical triangle is as big as the size of the
triangle itself.

- In order to define the size of the triangle, you should extend the shorter level,
so it will be the same size as the other level. The distance between the ends
of the two levels is the potential size, which the price is likely to accomplish
after the triangle’s breakout.

- When you enter a trade based on a symmetrical triangle breakout, you should
put a stop below the opposite level to the breakout. Also, you should
conform the stop with one of the tops/bottoms on this level.

- When the minimum target is reached, close only 50% of the trade in order to
strike for a further price move in your favor. Then use a simple price action
rule to close the other half of the trade.


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