In order to become a successful trader, you will need to be able to recognize as many “trend positive” patterns as you feasibly can. This way, trading can be much less of a guessing game and much more of a process that is backed by actual trends.
No matter what market you may currently be trading in—foreign exchange, stock market, bond market, etc.—there will be at least some geometric patterns that can help you make more accurate predictions. By waiting until a new position can be supported by quantitative data, your daily winning percentage should considerably increase.
One of the most popular methods of geometric trading is known as triangular trading. As the name might suggest, triangle trading strategies seek to identify clear “triangles” indicating whether a price increase or decrease is about to occur. Though you may want to use some additional technical indicators before opening a new position, triangle trading is an excellent method quickly evaluating current price trends.
In this article, we will explain how the triangle trading strategy works and how it can help you find opportunities where price increases are most likely to occur. We will also discuss how triangle trading can be successfully introduced into an already existing trading strategy.
What is triangular trading?
Triangle trading is a process that involves carefully analyzing recent price data in order to determine which future price movements are most probable. Triangle traders will be able to quickly “draw” angled lines directly above and below the recent price range, ultimately intersecting at the price point in the status quo. The angles that are formed on both the high and low ends of the price range will help you determine whether swings, breakouts, or continuations of the trend can be quantitatively justified.
Triangle trading is a form of price action trading—above all else, triangle traders will be concerned with the current price of the asset they are trading and most other technical indicators (though still useful) will be considered less relevant. Depending on your level of risk tolerance, you may want to what until “sharper” triangles have begun to form. Though triangle trading strategies can be applied to almost any speculative price graph, the presence of somewhat weak triangles can often be a bit too “noisy” for most traders.
Triangle trading can be used to exploit both the uptrend and the downtrend, meaning that you may want to apply triangular trading strategies when considering a short position. Successfully executing a triangular trade will be all about timing the market; while you will want to wait until the evidence of a breakout has emerged, you will also need to act quickly in order to maximize your overall rate of return.
What are the different types of triangle trading patterns?
All speculative assets will experience frequent oscillations over time, meaning that their prices will consistently move up and down within what can be considered a “normal” price range. In order to be a successful triangle trader, you will need to pay attention to the direction that both the high points and the low points are generally moving. Are the high points getting higher, lower, or remaining the same? What about the low points?
Once you have successfully identified the most recent (usually 3-5) high and low points, you will be able to loosely draw a triangle leading to the current price. These triangles will generally present themselves in one of three different forms.
- Symmetric Triangles are characterized by increasingly lower high points and increasingly higher low points. In other words, the general price range of the asset will be observably more condensed. As the price range continues to narrow—with less space and time between high points and low points—the price will eventually “run out” of places to go and a breakout point will become inevitable.
- Ascending Triangles occur whenever the high points remain consistent (creating a horizontal line) but the low points are consistently rising. While intuition may tell you that this means the average price of the asset is increasing, ascending triangles actually indicate strong levels of resistance. Once the high and low points have converged, a negative breakout is likely to occur.
- Descending Triangles use the same logic as ascending triangles, but these patterns occur in the opposite direction. With a descending triangle, the low points will remain steady (horizontal) with the high points gradually decreasing. Because the asset has demonstrated a solid “basement” trading level, descending triangles typically occur right before an increase in value.
Unless there has been a fundamental change to the value of the underlying asset, the breakouts following triangle trading patterns are typically rather short lived. Because of this, it will be important to act quickly and within a short-term time frame. This is why triangle trading is used much more often by day traders than it is by position traders.
What are the pros and cons of using triangle trading strategies?
Triangle trading has been used in many different markets and has been implemented in conjunction with many different trading strategies. In order to determine if triangle trading is right for you, it will be useful to consider all of its benefits and drawbacks.
The pros of triangle trading strategies include:
- Geometric Consistency: there are no “surprises” in the world of triangle trading, making it easier to make objective decisions.
- Easy to use: when a triangle trading pattern has formulated (which is only sometimes the case), you can analyze price movements and make quick choices.
- Above average returns: triangle trading is an active trading strategy that yields higher average returns than almost all passive trading strategies (such as index trading).
The cons of triangle trading strategies include:
- Subjective triggers: it will be up to you to determine when a breakout has actually occurred, meaning that it can be easy to enter a position too early (or too late).
- Human element: while the geometry behind triangle trading is consistent, the human forces behind the trading prices are not. Triangle trading, like all other active trading strategies, cannot guarantee a return on your investment every time.
- Short term: triangle trading strategies present a limited window of opportunity. They are not ideal for people who are unable to consistently monitor the markets.
Keeping these things in mind, you will be able to decide if triangle trading makes sense for you.
How can I successfully introduce a triangle trading strategy?
In order to help minimize the risk of triangle trading strategies, there are many different things you can do.
- Calculate the “size” of a triangle and use that figure in order to determine a realistic target price
- Determine a high to low point ratio that constitutes a reasonable breakout point
- Issue a stop loss order along (or right below) the horizontal portion of the triangle
- Combine triangular trading strategies with other easy to use technical indicators
- Use continuation trading more often than reversal trading
By implementing each of these risk management techniques, you can minimize the possibility of something going wrong while still maintaining the possibility of earning high returns.
Knowing which trading strategy is right for you will require ample experimentation and a considerable amount of practice. Still, if you are looking for an approach to trading that is easy, quick, and straightforward, you may want to consider using a triangle trading strategy. These strategies are geometrically consistent and have also been well-tested in many different markets.