Trading FX Triangles Simply

Yesterday’s FOMC statement rocked the US Dollar as the global reserve currency strengthened across the board. The GBPUSD and EURUSD went down more than a cent.

The USDCAD also gained substantial ground in this week’s of trading. In fact the USDCAD completed a classical triangle formation.

USDCAD TRIANGLE PATTERN

For those who join our live trading room regularly, they were aware of the fact that the USDCAD was building a bullish contracting triangle. This particular chart pattern is one of the best patterns to trade as it provides distinct entries and stop loss placement. Did anyone else trade the USDCAD triangle? Let us know down below in the comment section!

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First of all, the USDCAD has a strong uptrend when analyzing the daily chart. Especially the acceleration from +/-1.05 to 1.12 had lots of momentum and was completed entirely in the month of January.

During the following weeks, price saw many ups and downs. But do those ups and downs mean? Was price turning and ready to retrace?

No – price was in fact consolidating. It was making a chart pattern. This particular type of chart pattern is called a triangle or pennant or wedge. A contracting triangle to be precise. Due to the strong momentum prior to the triangle, there was a high chance that the top was going to break.

The reason why it’s called a contracting triangle is because each subsequent leg (or swing high, swing low) is shorter than the other. Usually these legs stop at a Fibonacci retracement ratio of the previous leg such as the 61.8% and 78.6% Fibonacci level. You can see the triangle in the screenshot – the purple circles indicate the end of each subsequent leg of the contracting triangle.

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With the USDCAD triangle, price stopped respectively at the 88.6% Fib, then the 78.6%, again 78.6%, again 78.6% and last but not least 61.8%. The last leg can in fact stop anywhere and it does not have to reach the bottom or top of the triangle.

Contracting triangles are great to trade because they provide clear entries and stop losses.

1)      One can trade the tops and aim for the bottoms, or trade the bottoms and aim for the tops. In that case, the stop loss needs to be below the previous bottom or top.

2)      One can trade the very last bounce off of the bottom  of triangle in uptrend

3)      One can trade the break of the triangle (stop loss below the bottom prior to break)

4)     One can trade the subsequent pullbacks and breaks up to the targets (opps for the after this article, pls see below what the targets are).

Let us know if you took any of these trades down below!

TRIANGLE TARGET

Usually speaking the triangle target is length of the momentum prior to the triangle. This number of pips should then be added to the bottom of the triangle (from the turning spot) and a target is in vision. In case of the USDCAD this means:

a)      1.12 – 1.06 = 600 pips.

b)      1.10 + 600 pips = 1.16

For the moment the best target is 1.16.

When we review the weekly chart, it becomes clear that there is no weekly resistance level until 1.17 (brown line).

When placing a Fibonacci tool on the daily upswing, Fibonacci targets become visible. Those are showing a -27.2% target at 1.1380 and a -61.8% target at 1.16. For the moment I am assuming upside momentum continuation until 1.1380, a bull flag chart pattern and a continuation till 1.16-1.17.

Remember, the only way to actually learn to trade is by trading. An important part of any trader’s arsenal is recognizing chart patterns. Any trader can get better at this pattern recognition skill by looking at the charts and trying to find them on the charts (and by all means go back into the past and look for these patterns).

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Thanks for sharing this article and Good Trading!!

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