Article Summary: It can be difficult for traders to identify price setups in consolidating markets. Traders can identify and trade triangles to simplify the process.
In strong trends market decisions tend to come easier to traders. Traders reasonably expect to buy in an uptrend and sell in a downtrend. However, market indecision and consolidating markets can be harder to decipher leading to some difficult trading decisions. It happens all too often that trend traders must suddenly shift gears and come up with a new trading plan.
So what are we to do when there are no new market highs or lows to trade?
One suggestion is to trade a breakout using a consolidating triangle pattern. A triangle can be identified by identifying currency pair’s lines of support and resistance. Below we can see a triangle forming on the GBPJPY. Resistance is seen descending as our highs gradually get lower. At the same time, a line of support can be seen advancing as our lows increase in value. Once these areas have been identified, we can then proceed with our breakout strategy.
Learn Forex –GBPJPY Triangle
(Created using FXCM’s Marketscope 2.0 charts)
Breakouts Using OCO Orders
Once a triangle pattern is found, we can then begin setting orders in preparation for a breakout. By using an OCO (one cancles the other) order, both a buy entry and sell entry can be pending at the same time. This is a great opportunity if you are unsure about which direction the market will break. If price breaks above resistance, we will look to buy the GBPJPY. Conversely if price drops below support we will look to sell the currency pair. It should be noted that as soon as one order is executed, the other pending order will be deleted from our orders menu.
When setting up an OCO order a stop can be added to both pending orders. One idea is to set a stop where our previously identified levels of support and resistance converge. When trading a triangle, in most scenarios this will create a potential stop equidistant between our two pending orders. Now all that is needed is a take profit point to complete our trading idea.
Learn Forex – EURAUD Building Blocks
Created using FXCM’s Marketscope 2.0 charts)
Traditionally most traders look to use a 1:2 Risk/Reward ratio or better when trading breakouts. This can be extrapolated by looking for twice as many pips in profit as we are risking with our stop. Another methodology is measuring the distance between our high and low point of the triangle. In the example above this equates to a value of 361 pips, which can be used to find a primary profit target.
---Written by Walker England, Trading Instructor
To contact Walker, firstname.lastname@example.org. Follow me on Twitter at @WEnglandFX.
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