Symmetrical Triangles

Symmetrical triangle patterns can be found in almost any market and any time frame. They normally signify some indecision in the market and as the pattern develops it is common to see a decrease in volume. The pattern forms as the bar's highs and lows inside the triangle converge so as to outline the shape of a triangle.

Symmetrical triangles have a tendency to break in the direction of the preceding trend and are often accompanied by heavy volume. Although this is often the case it is not a given and regardless of the direction of the break there are normally good opportunities to trade the breakout.

The fast way to tell if it's a bullish or bearish triangle is to find the first point of contact farthest to the left inside the triangle (see chart example). If the first point of the triangle is at the top left then it is a bullish triangle. If the first
point in the triangle is in the bottom left then it is a bearish triangle.

To find a potential target of a triangle you can measure the base of the triangle and then add or subtract that from the breakout point. Lets assume that point 1 in our bullish triangle is 95 and point 2 in the triangle is 80. If you take 80 from 95 you get 15. Now lets assume the breakout point is 88. You add 15 to the breakout point to get 103. Therefore 103 is the target area for the breakout.

The same applies to the bearish triangle. If point 1 were 80 and point 2 were 95 you would still deduct 80 from 95 to get 15. If you get a breakout point of 85 you would now deduct 15 from 85 to get 70 as a potential target point.

In the example of the Japanese Yen (see second chart) point 1 was 111.71 and point 2 was 102.00 which gave us a base of 9.71. The breakout occurred at approximately 108.90. If we add 9.71 to 108.90 it gave us a target of 118.61.

Although symmetrical triangle can often mean continuation of the trend this particular triangle (second chart) formed at the end of a downtrend and broke up.

Rectangles

Rectangles can occur in any time frame and any market you are following. As with many chart patterns the pattern is in the eye of the beholder. I have found that some traders are better than others at identifying chart patterns. It may take some time before you can spot the most common patterns.

The rectangle contains price movement between two points in a rectangular shape to which we add lines to signify the upper boundary and lower boundary. These lines should be horizontal. Slanted rectangle will most probably fall into the realm of ''Flags'', which we will discus in another lesson.

The top line should connect at least two bars and the bottom line should connect at least two bars. As most markets are in congestion most of the time rectangles are fairly common.

It is not necessary to draw the top and lower lines at the extreme of the congestion points but rather make sure the lines contain at least 95% of the congestion area. The longer the rectangle continues the more important the breakout.

To help identify a valid breakout there should be an increase in volume on the day (or time period) of the breakout. The breakout can occur in either direction but if you are in a defined up trend then an upside breakout is favored and vise versa for a down trend. If I am in a defined trend then I tend to view this pattern as a continuation patter unless it starts to break the other way.

There are a number of ways to trade the rectangle. You can buy or sell the breakout as it happens or you can wait to see if there is a pullback to the neckline (see charts). Once you have defined the rectangle you can also buy and sell at the boundaries of the rectangle. I prefer to buy at the lower boundary if in an up trend and sell at the upper boundary if in a down trend. This can be a very effective trade as the risk is small. If you sell at the upper boundary then your stop loss can be close to the boundary and vise versa for the long trade at the lower boundary.

If you sell the breakout place your protective stop inside the rectangle and do the same for buying the upside breakout. You can also measure the distance between the upper and lower boundaries and project the distance forward to get an indication of the size of the next move. If the distance from the upper to the lower boundary were 20 ticks then I would expect the next move to be at least 20 ticks.

Outside Day Trading

Outside days can occur frequently on daily charts. The secret of the outside day is the bigger the better and it has more meaning if found at the end of a trend.

They can be short lived and I always take my profit quickly. The outside day (OD) should completely encompass the previous day. It must have a higher high than the previous day and a lower low than the previous day.

One of the most important things about this pattern is that the bar closes in the opposite direction of the trend. If the trend is down the close on the OD must be near the high or in the upper part of the bar. The opposite is true of the up trend. The OD may still work if this is not the case but my research show that it is more effective if it does close in the opposite direction.

A great example of this happened on the cash Dow as I was trading it (24th July 02, refer to chart). I like to trade this in two ways. First, depending on what the market has been doing prior to the outside day I will place a entry order a few ticks above the high of the OD if the trend has been down and I am looking to get long. Once I am in the market I will place my stop loss either as a dollar amount or at the .618 fibonacci retracement of the OD.

If you don't know anything about fibonacci don't worry, we will cover that in future lessons. The same applies to the short trade. If the OD occurred at the end of an up trend and I am trying to get short, I will place my entry order a few ticks below the low of the OD. Once taken short I will place my stop loss order in the same way as the long trade, either as a dollar amount or as the .618 fibonacci retracement.

The second way I like to trade this pattern is to trade it intraday. I closely monitor what happens at the high of the OD if I intend to go long and the low of the OD if I intend to go short.

Once the high or low has been taken as the case may be I will then enter the market on a 5 minute or 1 minute chart. For long position I will buy the first retracement with a tight stop loss order under an intraday support and if trying to get short I will sell the first rally with a stop loss order above an intraday resistance.

Below are two examples of Outside Days. The first occurred at the end of a down trend and the second occurred at the end of an up trend.