Over the weekend at the Trading and Investing Expo in Sydney I was able to talk through dozens of chart setups with different attendees so I actually have plenty to share with you all in the week ahead. Taking something of a 'follow the sun' approach I am looking firstly at an Australian company - Aquila Resources (AQA).
Thisis a symmetrical triangle which is sometimes referred to as a 'coil' because the price is being forced into a narrower and narrower price range by rising support and falling resistance lines.
One of the things that I typically like to look for in this type of triangle formation is that it forms up something of a 'rest period' in the trending movement and not a continuation of a sideways 'ranging' phase that you may otherwise see in a chart.
In the case of the symmetrical triangle the trader can utilise a breakout in either direction and trade to the long or the short side. If there is a significant trend leading into the formation though you may feel more comfortable if the breakout continues in that direction. It's for this reason that we often look to the dual timeframe confirmation using the daily and weekly (in this case) stochastic oscillator to ensure that we are trading the breakout in a direction confirmed by this indicator. When I say confirmed it means that you don't want either indicator to be in overbought territory (if trading long - vice versa if short) and you want the fast line - %k - to have crossed in the bullish (again only if long) direction over the %d line.
This crossover is not part of the normal descriptors of the triangle setup but is worth considering with this and other setups that you look for. Something that is much more typical is to look for a spike in volume when the breakout occurs as additional confirmation that you have a signficant market movement appearing.
As always I would suggest that the trader waits for at least 1 close outside of the pattern before entry to try to reduce the chance of whipsaw trades. The stop can be placed either just on the inside of the pattern or on the far side of the pattern. The closer the trader places it the better the risk/reward but the higher the chance of a whipsaw trade - unfortunately there is always a tradeoff that needs to be made.
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