Expanding Triangle Trading Strategy #2
In the first strategy, we treated the expanding triangle as a trading range, and traded the price movements within the range.
The second strategy we are going for is to treat the expanding triangle as a continuation pattern, and look for a breakout in the same direction as the prior trend.
Personally, I do not like this strategy, as I feel that the odds are not as good, and it is hard to find many instances of a successful breakout. The probability of a reversal is higher due to uncertainty of the pattern.
As such, I was unable to find a good chart example, and I have simulated a price breakout instead.
In the example above, we see a prior uptrend, followed by the expanding triangle, then we see prices break out (simulated prices in blue dotted lines).
The breakout is inherently challenging because prices are trying to break above a line which is sloping upwards, which means prices need to move up a lot in a short period of time. If the breakout is too gradual, it will appear to just be moving along the edge of the line, making it hard to tell whether a real breakout has taken place.
The best breakdown will be one in which prices shoot past the line, then pulls back to form a stable base.
For trading, we would look to enter near the stable base once it has been established, to act as a launchpad for the next leg of movement upwards.
Note that this strategy works just as well in a downtrend, you’ll just have to flip the pattern around for a downside breakout.
This strategy works best if the prior trend (before forming the triangle pattern) is strong, and has a higher chance of success if the triangle is smaller, in terms of height and duration.