Forex Chart Secrets: The Power of the Triangle
If someone told me I could only trade one way, I know what I’d pick… hands down.
There are many ways to trade. Some are complex and some are simple. But I’m a pretty simple man. Show me an easy way and a complex way, and I’ll take the easy way every time.
The complex way to trade is to scour tons of fundamental data and weigh each piece of information you come across to see if you think an asset should go up or down. It takes a lot of research and digging for hours, if not days, to trade this way.
Then there’s another complex way that people trade, which is to use a ton of complicated technical indicators all over their charts.
Some traders use as many as 10 of these indicators on a single chart.
Problem is, using so many indicators will often give out conflicting signals. And, when it’s all said and done, you have no better idea about which way to trade than did without the indicators.
But there is a simpler and surer way… understanding the power of the triangle.
The Power of One Simple Pattern
If you can spot the shape of a triangle on a chart, it means a huge breakout is coming… and that also means an opportunity for big profits.
The real beauty of the triangle pattern is that you know what’s coming ahead of time. The triangle tips you off.
It works just like a tug-of-war. Two opposing sides tug back and forth, at first almost canceling the efforts out of the other. But eventually, one team tires and is dragged across the line.
The same thing happens with a triangle on a chart. You have two opponents: the bulls, who think the asset should go up… and the bears, who think that the asset should go down in value.
Both sides push the financial asset back and forth until one side tires and gets pulled across the line.
The line, in this case, is the point at which the asset breaks the triangle pattern either to the upside or the downside.
Back on April 22, 2010, I wrote about the sell-off that would happen in Chinese stocks.
How did I know it was going to happen? Did I have a crystal ball? Nope, but I had the next best thing.
The triangle broke to the downside, so I knew the bulls were exhausted and the bears had won. Check it out below.
You’ll see from the link to the previous article that I was able to call the downfall in Chinese stocks as the breakout was just beginning. And when one side of the tug-of-war wins, they win big. How big? Well, believe it or not, it’s measurable.
You can see this on the chart by looking to the open side of the triangle, to the left. If you measure the width of the open side of the triangle and use the length of the width as a “yard stick” to measure with, you can take that width and project it downward from the point at which the index broke below the triangle.
Now you have a minimum price target for the index.
So, the triangle also lets the price action tell you which way to trade. Once the breakout happens, you have your direction to trade in (which in this case was to sell-short).
I used this breakout in the Shanghai Composite Index to trade some currency pairs that are highly correlated to the index, and it gave me some powerful and profitable moves.
Then, thanks again to the triangle, I also knew when the index was approaching its price target and when it was time to exit my trade.
The Triangle’s Power is Widely Applicable.
Microsoft (MSFT) is now forming a triangle that has been coiling up for almost two years.
When it breaks out, it will likely be a very powerful, directional move. Check it out below.
But here’s what I like best — these kind of patterns in the currency market. I find them on all sorts of time frames, 15-minute charts, one-hour charts, four-hour charts, daily charts, you name it.
Here is one forming now on USD/CAD, on its daily chart, as it prepares for its upcoming explosive breakout. Check it out below.
All you have to do is look for a “coiling up” action after a sharp move higher or lower. You see, these triangles are a form of consolidation.
After a financial asset runs for a long time, it needs to stop and catch its breath just like a jogger would. Then, once it has consolidated for a while or caught its breath, it’s ready for the next big run!
How You Can Profit
Simply let the market decide by waiting for one side of the triangle to break. Once that happens, you have the direction.
Then, you can measure the “minimum price target” by measuring the width of the open side of the triangle and project that up or down from the point of the breakout. This will give you some comfort in knowing how long you can stay in the trade to help maximize your gains.
Once the asset approaches its price target, you might close out part of the trade, move your stop up or simply close out the trade all together.
There’s no complex analysis here, no fundamental numbers to crunch or complex technical indicators to interpret. All you do is find the triangle and wait for your moment to trade.
I’ll be trading this pattern a lot with my Currency Cross Trader subscribers throughout 2012. I’ve never seen a year where there wasn’t an abundance of them.
May the force of the triangle be with you.
Have a Nice day!
Sean Hyman, Editor
Currency Cross Trader
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