Using the Triangle Analysis When Making Trades
In day trading, hundreds of strategies have been developed and the goal of any trader is to find a strategy that suits him. A trader needs to find a strategy that is easy to understand, easy to implement and one that works too. Other traders have actually developed their own systems based on how they understand the market. In this article, I will have a look at one of the most common strategies which is based on triangle analysis. In triangle analysis, a trader looks at a number of points, then creates a triangle from them. Here, the trader looks at the price action and when it reaches two identical or near identical highs and lows. Then, the trader connects these points to form a triangle with the zone inside it being referred to as congestion zone or consolidation area. From these areas, the trader then identifies the support and resistance levels with the highs forming the resistance levels and the lows forming the support levels.
To interpret the rectangle pattern, it is important to compare it with the previous price action. Therefore, finding and analysing a particular triangle demands that you take some time to analyse the previous patterns before making the final choice. As a result, it is important to focus on one or two instruments because focusing on many of them will be a bit challenging for you.
Triangle traders have identified a number of triangle patterns including: symmetric, ascending, descending, and broadening triangle. The first three are easy to spot and easy to trade with compared to the broadening triangle because of the large moves involved which could easily lead to a breakout. In addition, they are not very common because they happen at reversal points.
A symmetrical triangle is the most commonly used triangle, and one of the most reliable because of its ability to indicate quality support and resistance levels. This happens when a currency pair is continually trending leading to a position when the bulls and bears are evenly matched. In this consolidation area, the currency or commodity pair reaches higher lows or lower highs forming converging lines. At the same time, the volume goes south as the market participants considers the next steps. At this point, traders are constantly looking at the apex which is where the two trendlines meet. The apex will then be the breakout point and the trade can go either way.
An ascending triangle pattern is one which has lower price highs and higher price lows constantly occur. A trader needs to identify the lower highs and the higher lows and then create a triangular chart. In most cases, the resistance line of an ascending triangle is usually horizontal and not sloping. The goal of the trader is to place a buy position when the lower line is touched and then exit when the upper line is touched. This should continue until the apex point is reached because this will indicate a breakout point. In a breakout point, the trade can go on either side.
A descending triangle pattern is similar to an ascending pattern with the only difference being the direction of the slope. Here, the support line follows a horizontal trend with the two swing highs and two swing lows in price. By identifying these points, you need to draw a line that connects them. Then, you should go ahead and buy when the price touches the lower side and sell when it touches the upper side.
When using triangle patterns, it is important to understand a number of things. One, you should first know the type of market you are in. Here, you should identify whether a market is trending or a swing market. In a swing market, you should avoid following the strategy. Secondly, you need to be aware of the economic calendar. When there is high volatile data coming up, chances are that you will not realize the best from the triangles. Whenever data is released, the market has a tendency of behaving in certain ways. At times, the market responds positively to the data and at times it doesn’t. Therefore, you should have a good understanding of the market before you start charting.