- Large Forex Triangles often indicate market indecision.
- Sometimes more than one triangle forms within the larger triangle
- Two nested triangles have formed on the GBPUSD daily chart and the upcoming BOE rate decision could spark the next breakout.
The Forex triangle price pattern is useful in helping traders define an area where the next big move may happen. With it, traders know that they can participate early in the continuation or reversal of a trend. Usually, triangles act like a question mark at the end of the sentence. This questions can usually be answered after a piece of fundamental data is released.
There is a question that the market needs to have answered before it can take GBPUSD to higher highs or to lower lows. The question may go something like this, “Will the Bank of England keep rates and asset purchases unchanged?”
The answer to that question should shift the balance of power to either the bulls or the bears. This is when breakouts happen as either the bullish side or bearish side emerges victorious. The moves can be rapid in one direction. On the other hand, these moves be complex in nature looking like erratic whipsaws.
Learn Forex – GBPUSD Daily Chart Nested Triangles
(Created using FXCM’s Marketscope 2.0 charts)
In the GBPUSD daily chart above you will notice a 330-pip tall triangle nested within a larger 571-pip triangle. The height of a Forex triangle is used to establish price targets. These “measuring” objectives may be exceeded or price may fall short of the target. However, in nested triangles, price may first breakout below the ‘Sell Zone’, pictured in red, and hit the smaller price target then U-turn back up to hit the larger 571-pip price projection.
GBPUSD may could also do the reverse and hit the smaller triangle price target after breaking into the green ‘Buy Zone’ then turn suddenly to hit the larger triangle sell target. Thursday’s Bank of England rate decision could be the catalyst for the breakout.
If on April 10th at 7:00AM ET, the Bank of England leaves rates unchanged at 0.50% and the leaves the current rate of asset purchases at 375B, then we could see the 1.7000 level touched. A surprise rate hike would also be bullish for GBPUSD as it would be a vote of confidence for a stronger UK economy. On the other hand, a surprise rate cut or increase in asset purchases could send cable dramatically lower.
How to Trade
The DailyFX+ Speculative Index, SSI could be useful to filter out our trading decisions. If we notice that SSI is at -2 or less, then we would only take breakouts in the buy zone above 1.6683.
A protective stop can be placed below the last swing low. In this way, we can simplify our decision process. A flip in SSI from -2 to +2 and above would be a signal that the trend has changed and we would then consider entering short. The stop loss on a short trade would be placed above the last swing high.
---Written by Gregory McLeod Trading Instructor
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