Have you ever traded the Symmetrical Triangle chart pattern? If you did, then you know it’s not as easy as it seems.
This post was originally posted here. The writer, Rayner Teo is a veteran community member and blogger on InvestingNote, with username known as Rayner and has 457 followers.
You might have thoughts like…
Should I trade the breakout of the Symmetrical Triangle or do I wait for a pullback?
Where should I put my stop loss so the market doesn’t hunt my stops?
How do I know which direction the Symmetrical Triangle break out?
Now if you face any of those issues, don’t worry.
Because in today’s lesson, you’ll have the answers to these questions (and more).
OK, let’s get down to business…
What is a Symmetrical Triangle chart pattern and how does it work?
The Symmetrical Triangle is a volatility contraction pattern.
This means volatility in the market is shrinking and a sign the market is likely to breakout, soon.
Now you’re probably wondering:
“So how do I identify a Symmetrical Triangle?”
How to identify a Symmetrical Triangle correctly
- The sides of the triangle slope equally (that’s why it’s symmetrical)
- The triangle has lower highs AND higher lows – at least two of each
- It looks like a funnel, with the price “squeezing” from the left towards the right
Now, the price cannot be “squeezed” forever.
Eventually, it must break out.
And when it happens, it offers profitable trading opportunities for the astute trader (more on that later).
But for now, here’s an example of a Symmetrical Triangle…
A Symmetrical Triangle usually takes a few months to form.
If the duration is only a few days or weeks, then it’s probably not a Symmetrical Triangle and possible another Trend Continuation pattern (like Flag, Pennant, etc.).
Don’t make this BIG mistake when trading the Symmetrical Triangle, here’s why…
A common mistake traders make is “chasing” the breakout of a Symmetrical Triangle.
Because in the short-term, the buying pressure is exhausted and have no more “energy” to push the price higher.
So what happens?
The “smart money” starts to take profit.
Then, bearish traders will look to short the markets.
Slowly, the market starts to reverse…
At this point, traders who bought the highs are sitting in the red.
And when they can’t take the pain any longer, they cut their losses.
Increased selling pressure which causes the market to reverse lower.
Here’s how it looks like…
Now you’re wondering:
“Is there a better way to trade the Symmetrical Triangle?”
And that’s what I’ll cover next.
How to better time your entries when trading the Symmetrical Triangle
You’ve probably heard this a gazillion times…
The trend is your friend.
And it’s true.
So, how do you trade with the trend?
Well, you can use an indicator like the Moving Average (MA).
If the price is above the 200-period MA, then you have a long bias.
If the price is below the 200-period MA, then you look a short bias.
Using this simple rule, you’ll be on the right side of the market more often than not — and improve your winning rate.
Let’s find out how you can better time your entries when trading the Symmetrical Triangle.
Here are 2 techniques you can use:
- The First Pullback
- The Re-test
The first pullback
Often, the price breaks out of the Symmetrical Triangle and it becomes “overextended”.
Here’s what I mean:
Now, you don’t want to enter right now because the price is “overextended” and your stop loss is wide.
So, what do you do?
Well, you can wait for a pullback to occur (like a Bull Flag pattern).
Once it’s formed, you can long the break of the highs and have your stop loss below the swing low.
This offers a more favorable risk to reward on your trade.
When the price breaks out of the Symmetrical Triangle, it might re-test the previous market structure.
Here’s an example…
Symmetrical Triangle: How to maximize your profits and ride enormous trends
Here are 2 techniques you can use:
- Trailing stop loss
- Price projection
1. Trailing Stop Loss
Here’s the thing:
No one knows how high or low the market can go.
And by trailing your stop loss, you allow the market to reward you as it moves in your favor.
You can use the Moving Average (MA) to trail your stop loss.
You can use the 50MA to trail your stop loss.
If the price closes below it, then you’ll exit the trade.
Here’s what I mean…
You can use the 20MA if you want to ride short-term trends or 200MA if you want to ride long-term trends.
2. Price projection
This technique is based on classical charting principles.
Here’s how it works:
- Take the distance between the high and the low of the Symmetrical Triangle — the widest point of the pattern
- “Copy and paste it” at the breakout point
- Exit your trade at the price projection level
Here’s an example:
Symmetrical Triangle Trading Strategy
Now, let’s take what you’ve learned and develop a trading strategy.
If you have followed me for a while, you know I like to use the IF-THEN template to develop my trading strategies.
Here’s how it works…
If the price forms a Symmetrical Triangle, then wait for the price to break out.
If the price breaks out, then wait for the first pullback (ideally small bodied candles).
If the price does a pullback, then go long on the break of the highs.
If the price breaks the highs, set your stop loss 1 ATR below the swing low.
If the price moves in my favor, then trail my stop loss using the 50MA.
Here are some examples…
Red = Initial Stop Loss
Blue = Entry
Green = Exit
Brent Crude Oil Daily:
Here’s what you’ve learned today:
- The Symmetrical Triangle is a sign the market is about to break out
- Don’t “chase” the breakout of a Symmetrical Triangle because that’s when the price is likely to reverse
- You can enter on the First Pullback or Re-test of the Symmetrical Triangle
- You can maximize your profits by using a trailing stop loss or the price projection technique
- A Symmetrical Triangle trading strategy (a template you can use)
Now here’s a question for you…
How do you trade the Symmetrical Triangle chart pattern?
Once again, this article is a guest post and was originally posted on Rayner‘s profile on InvestingNote.
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