Triangle Player

If you are in an orchestra, I wouldn’t suggest playing the triangle. You’ll get no respect. But, in the stock markets, it’s a whole different story. I like triangles because they are easy to spot, fairly reliable, and have a built-in method for choosing a price target. You can play breakouts from triangles in either direction.

Here’s a really nice one that I missed today, on NVDA. Had I spotted it in time, I would definitely have taken this trade.

Stop Loss and Price Target

The stop loss should be placed just beyond the other side of the triangle, when you make your entry. In the NVDA example, we shorted a breakdown from the triangle’s base, and put our stop just above the upper trendline. Had we played a breakout up from this triangle, the stop would have gone just below the triangle base.

To choose a price target, measure the distance of the price action on the first internal path from bottom to top, or vice-versa. In the NVDA example this would be the price move up from 28.60 to 29.10. The “textbook” method is to measure the height of the triangle at its tallest point, but I think it’s more reliable if you are a bit more conservative. So, I take that first internal height, since it gives me a slightly smaller target. If you look at the triangle play I made earlier today, you might notice that I would have hit the prescribed target if I hadn’t been so jittery and jumped out of the trade.

I pointed out yet another triangle play on STLD today in my twitter feed, which would have hit its target as well. It’s an example of trading a breakout through the slanted trendline, rather than the base:

The profit target is chosen from the first internal path in the triangle, from 39 down to 38.20ish. It’s not an exact science, so don’t bother counting pennies. Just get the approximate size of the move, and glance at various charts to make sure you won’t hit a support or resistance brick wall.

Make Sure It’s Actually A Triangle

The trickiest thing about triangles is having the discipline to only play the “real” ones. I mean, your brain will show you triangles all over the place. Like…. this one from today:

See how the price action leaves big holes of whitespace in the interior of the triangle outline? Compare that to the NVDA and STLD examples. You want multiple touches of the outline trendlines, without any big holes in the pattern. It looks obvious here, but I swear your brain will try really hard to convince you that bad triangles look good, when you are itching to trade. Be careful! The trade I took on WFR not long ago is an example of where I went ahead and played a malformed trangle. If I had been looking to trade, rather than just scalp it, I’d like to think I’d have the discipline to pass on that one.