Trading Forex Using Symmetrical Triangles

Introduction A Symmetrical Triangle is a chart pattern used in technical analysis that is easily recognized by the distinct shape that is created when two converging trendlines are drawn across sequentially lower peaks and sequentially higher troughs. Triangles fall under the category of continuation patterns. There are 3 different types of triangle patterns, ascending triangles, descending triangles and symmetrical triangles. These are sometimes referred to as horizontal trading patterns. In this report, we will focus on simple yet effective techniques that you can use to identify and capitalize on the Symmetrical Triangles pattern. A Symmetrical Triangle is generally regarded as an area where price has started consolidating or ranging. In the image below, you can see an example of what a Symmetrical Triangle looks like on a chart:

The upper trendline is usually referred to as the Supply Line, and the lower trendline is usually referred to as the Demand Line. At the start of the pattern, the triangle is at its widest point and as the market continues, the trading range begins to narrow towards the point where the point of the triangle is formed.

How Symmetrical Triangles Work The most common method of trading this pattern is to enter trades after a break above or below the trendlines. Take a look at the following image:

Once a Symmetrical Triangle pattern has formed, a new candle breaking the upper trendline will prompt traders to enter a Buy Trade. On the other hand, if a new candle breaks the lower trendline, traders will be prompted to enter a Sell Trade.

Continuation And Reversal Patterns A Continuation Pattern is a formation where price reacts and continues to move in the direction of the prevailing trend. A Reversal Pattern is a formation where price reacts and starts to move in the opposite direction in relation to the prevailing trend. On the following page, you can see an example of a Continuation Pattern and a Reversal Pattern in a downtrend.

When the market is in a downtrend and the price breaks the lower trend line, the Symmetric Triangle acts as a continuation pattern.

When the market is in a downtrend and the price breaks the upper trend line, the Symmetric Triangle acts as a reversal pattern.

When the market is in an uptrend and the price breaks the upper trend line, the Symmetric Triangle acts as a continuation pattern.

When the market is in an uptrend and price breaks the lower trend line, the Symmetric Triangle acts as a reversal pattern.

How To Identify Pivot Or Isolated Highs And Lows In order to identify Symmetrical Triangle patterns, you need to know how to identify Pivot Highs and Pivot Lows. Pivot Highs and Lows can also be referred to as Isolated Highs and Lows. A Pivot or Isolated High comprises of three bars or candlesticks with the bar/candlestick in the middle that has a High that is higher than the Highs of the bars/candlesticks to the left and to the right of it. A Pivot or Isolated Low comprises of three bars or candlesticks with the bar/candlestick in the middle that has a Low that is lower than the Lows of the bars/candlesticks to the left and to the right of it. You can see examples of Pivot or Isolated Highs and Lows on the following image:

Now that you know how to identify Pivot or Isolated Highs and Lows, you can use this information to identify Symmetrical Triangles. In the next section of this report, we will take a closer look at how to accomplish this.

How To Identify Symmetrical Triangles In order to have a valid Symmetrical Triangle pattern, we will require 2 Pivot or Isolated Highs and 2 Pivot or Isolated Lows. There are two possible scenarios… In the first scenario, you will notice that the Pivot or Isolated High is the first point to form on the extreme left hand side, just like the image below. Next, a Pivot or Isolated Low forms as the price moves down. Next, price moves up and forms a Pivot or Isolated High that is lower than the first Pivot or Isolated High. Price then moves down and forms a Pivot or Isolated Low that is higher than the first Pivot or Isolated Low.

Now let’s take a look at the second possible scenario… In this scenario, you will notice that the Pivot or Isolated Low is the first point to form on the extreme left hand side of the image below. Next, a Pivot or Isolated High forms as price moves up. Next, price moves down and forms a Pivot or Isolated Low that is higher than the first Pivot or Isolated Low. Price then moves up and forms a Pivot or Isolated High that is lower than the first Pivot or Isolated High.

In both the scenarios described in the images above, price has the opportunity to break above or below the Supply and Demand lines. Once a break out occurs in either direction, we can look to enter a trade in the direction of the break out.

How To Identify Valid Breakouts

Now that you can identify Symmetrical Triangles using Pivot or Isolated Highs and Lows, you can look to take advantage of the breaks above and below the Supply and Demand lines. The best trading opportunities occur when price close above or below the Supply and Demand lines. But…

BEWARE OF FALSE BREAKOUTS!

False breakouts occur when a candle breaks above or below the Supply or Demand lines signaling a potential trade entry, only to reverse and go in the opposite direction. For this particular reason, we will ONLY rely on Closes above or below the Supply and Demand lines and not on the Highs and Lows of a candle exceeding these levels. Take a look at the following image…

Here, you can see that price has formed a Low below the Demand line.

This is not a valid signal to enter a trade to the short side because the candle has not closed below the Demand line telling us that there is a possibility that price may reverse and move upwards. If this were to happen we do not want to be in a Sell trade. Now, let’s take a look at a valid trade signal, take a look at the following image…

This is a valid signal to enter a trade to the short side because the candle has closed below the Demand line telling us that there is a possibility that price may continue to move in the direction of the breakout. If this were to happen we want to be in a Sell trade. The same rules apply to breakouts above the Supply line. For instance, if a candle forms a High above the Supply line, we do not consider this to be a valid trade signal. However, if a new candle forms and closes above the Supply line, we will consider this to be a valid Buy entry. Breakouts are great but in many cases, traders enter a position immediately after the breakout and find that price reverses and the trader is stuck in a bad trade. In the next section, we’ll take a look at a way to ensure you only enter the best trades.

How To Pinpoint The Entry In order to avoid getting in to a trade too early, we use a simple technique to identify the precise entry level where we should enter a Buy or Sell trade after a breakout. To accomplish this, we simply wait for a breakout of the Supply or Demand lines. Once the breakout occurs, we wait for the candles to form a Pivot or Isolated High or Low. We then place a pending order 1-2 pips above or below the new Pivot or Isolated High or Low which has formed. Take a look at the following image…

Here, you can see that the we identified the Symmetrical Triangle using the Pivot or Isolated Highs and Lows at points A, B, C & D. Not long after point D was formed, there was a breakout to the short side. As you can see, if you entered a Sell trade on the breakout candle, you would have been whipsawed and possibly stopped out of the trade not long afterwards. Instead, we wait for a new Pivot or Isolated Low to form at point E and place a pending order to Sell 1-2 pips below the low of the candle.

Here, you can see another example of the entry but this time, we have the breakout occurring on the Supply line for a Buy trade. Take a look at the following image…

As you can see, we identified the Symmetrical Triangle using the Pivot or Isolated Highs and Lows at points A, B, C & D. Not long after point D was formed, there was a breakout to the long side. We waited for a new Pivot or Isolated High to form at point E and placed a pending order to Buy 1-2 pips above the high of the candle. By using this type of technique to enter a trade, you are ensuring that you get into a Buy or Sell position only when the price exceeds the original breakout candle. If price does not exceed this level, your order will not be filled and you would have avoided getting into a trade that would have not gone any further in the original direction of the breakout. If you place a pending order and it does not get filled, you may delete the order and search for new setups. That’s all there is to it!

Summary While there are many different techniques that can be used for trading with Symmetrical Triangles, you will find that using this approach will often keep you out of bad trades and get you into trades that have a very high probability of reaching your target profit levels. Symmetrical Triangle patterns occur on all time frames and on all currency pairs, so you should have no trouble finding potential trade opportunities once you have learned how to identify these patterns. Remember that on the smaller time frames, like the 1 minute and 5 minute time frames, there may be a lot more whipsaws and the trading range may be a lot smaller than compared to the higher time frames. You will also find that there are far more patterns emerging on the lower time frames compared to higher time frames like the 4 hour and Daily charts. As a result, you should reduce your take profit levels and be wary of over trading on the smaller time frames. For smaller time frames (1, 5, 15 minutes) you may use a fixed take profit level of between 5- 20 pips. For larger time frames (4 Hour, Daily) you may use a fixed take profit level of between 20-60 pips. Stop Losses may be placed the same number of pips away as your Take Profit level to give you a 1:1 Risk/Reward ratio, or above or below the most recent support/resistance areas. You may also consider using a 2:1 Risk Reward ratio in which case your take profit level will be twice as large as your Stop Loss. You can explore these alternatives along with any other combinations you may find as you get more familiar with these patterns so don’t be afraid to experiment. Wesley Govender www.tradeology.com