While the world is awash in sovereign cash, interest rates are at extreme lows, and no one in power has either the guts or the brains (I'm not sure which is missing) to do what needs to be done to exit this crises, technical considerations take on a more significant place in forex market and trade calculation.
One of the most prominent chart patterns, especially in forex, with which you should be familiar are triangles.
There are three main patterns here that should be quickly recognizable, a symmetrical triangle, a falling triangle, and a rising triangle.
In the picture above you see an image (although not a very clear one) that I had to capture from off the web to illustrate these. The top image is a symmetrical triangle, where the top line is falling and the bottom line is rising. This is frequently referred to as continuation pattern. In other words, the market stops its move and rests, with prices compacting into an ever narrowing range. The likelihood is that the price action will break out in the direction of the already established trend. So the strategy is to enter the breakout in the direction of the trend, and set your stop at the opposite corner of the triangle, which forms the most recent swing high or low.
The next figure is that of a falling triangle, also known as a falling wedge. It has a falling upper line and a flat lower line. Simply looking at it should give you an idea of where prices will go upon exiting this pattern. As a rule, when they break the lower flat support line, the price action will drop. You can really see what is happening as the bulls a re defending their "line in the sand", but they can't push prices up. So each up move gets smaller and smaller, as fewer and fewer buyers are willing to take on the risk. Eventually the market runs out of buyer sand even the line in the sane fails. Set your stop in the same manner as the previous one, just above the upper corner of the triangle. You can also calculate an initial price target, bu taking the wide end of the triangle and applying it to the breakout. So a triangle that is 30 pips wide on the left end, will give you an initial target of 30 pips on the break down.
Rising triangle are traded in just the opposite manner. You look for the pattern to resolve itself to the upside, then target your trade using the wide portion of the triangle. Set your stop the same way.
Please note, this manner of setting stops and targets means you basically have a 1-to-1 reward to risk ratio in your forex trades. But as you are trading in the direction of an already established trend, you price target is only a "soft" one. there you may exit half of your position, and let the other half ride while moving your stop to B/E. or you can retain your whole position while moving your stop to B/E. Expecting the market to continue its trend, and trading in that direction, means you may have a much a larger target than initially calculated by the size of the triangle. At any rate, you should end up with pretty reliable trades, and a higher percentage of winners versus losers, even if you are 1-to-1.
Lastly, please note the chart of the eur/usd in the upper right corner, you can see a good picture of an ascending triangle. This is today's chart. A breakout could yield a 120 pip move!
Happy Trading!
Bill
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