The 2 Best Trading Triangles and 1 We Avoid
On our blog, we have been discussing the top performing triangle patterns over the past few years.
NFLX, AMZN, SCWX, UPLD and others that have recently soared over 25% within a few weeks out of bullish triangle patterns.
Today I am going to share with you 2 triangles we look for when swing trading and the one that is often hyped but we tend to avoid. We will also look at one still near a good technical entry point.
Why We Trade Bullish Triangle Chart Patterns
The first thing to understand about triangles and chart patterns in general is that they tell you what has been happening recently to a stock. Fundamental analysis you read about online or watch on television contains a lot of speculation of what should happen to a stock.
Meanwhile, chart patterns and technical analysis tells you what has happened and what is happening right now in the open market. Technical analysis is looking at the facts – not hype and speculation.
What I mean by that is that the price will start to move lower from a high point on a chart once the sellers overwhelm the buyers. Also, a stock will move higher from a low point once the buyers are purchasing more shares than the sellers at that price. Regardless of what we think a stock is worth.
Triangle patterns are unique situations where both the bulls and bears are making progress by forcing the price up or down at 2 points that are converging. If we draw a line connecting the swing highs and swing lows, they will cross each other at some point to the right on the chart.
Eventually, either the bulls or bears will win the battle in the open market. When the top or bottom trend-line is broken, you often see an explosive move in that direction as shorts cover or longs sell to avoid a loss after accumulating trading positions.
Trading Triangle #1 – The Bullish Symmetrical Triangle
Now the first bullish triangle pattern we like is the bullish symmetrical triangle pattern. This is a triangle pattern that has successive lower highs and also higher lows in the triangle portion of the pattern. A straight line can be drawn connecting the highs and lows in the pattern as with all triangle patterns.
Here is a great example that appeared in our alert service. You need to have at least 2 lower highs in the pattern and 2 higher lows. Although its better to have 3 or more that more or less line up.
We often skip the ones that have only 2 lower highs and 2 higher lows. More about that in a moment.
The chart below makes it perfectly clear what a symmetrical triangle pattern is. Notice how a line can be drawn connecting the highs and lows on the right side of the chart. The 2 lines will eventually meet where the price will either breakout to the upside or downside.
EHTH reached our target entry point which was a close above the top trend-line in the pattern after featuring it to customers. It then consolidated for a few days before rising sharply 4 trading days later.
It quickly moved about 50% higher in a month or so after breaking out of the triangle.
The triangle patterns we trade are on top growth stocks and UPOD stocks within long-term uptrends. This gives us an edge over trading typical triangle patterns.
The reason we want to see 3 lower highs is because a third high confirms the downtrend in the triangle. At that point, more traders are often playing the top trend-line resistance – selling or shorting near the top trend-line.
Triangle Breakout – Entry/Exit Points
The breakout and technical entry point occurs once the price goes above the top trend-line. At this point, many shorts will likely cover their positions as the trend is breaking to the upside. And/or the sellers are finally losing the longer-term battle as the buyers begin to overwhelm them.
We usually wait for the price to actually close the day above the top trend-line unless there is a significant new news catalyst causing the price to surge out of it during the day.
Another good entry is a close above the top trend-line and then a move above that day’s high the next day. A good stop would be below the prior swing low. Another stop we often use is a close below the long-term uptrend support if one exists. The better triangle patterns occur on stocks with a consistent uptrend support like the one above.
We like to find the best triangle patterns on top stocks within a strong long-term uptrend with a consistent uptrend support line. 2 examples are EHTH and SCWX which can be seen on the subscription site.
The standard profit target used is often about 20% above the technical entry point when trading this type of triangle pattern.
However, if the stock gets off to a strong start like this, one strategy is to wait until it closes below the 20 EMA and moves below that days low.
Or, we sometimes wait for a rebound off the 20 EMA into new highs and sell into that rally. We do this by putting a stop below the prior days low or just selling when its well above a reasonable target at that point and has a weak day.
With our strategies, we also keep some of our position until it breaks the longer-term uptrend support which could take years on top growth stocks.
Ascending Triangle Pattern
One type of triangle pattern we avoid is the ascending triangle. This is where a stock makes higher lows while finding resistance at the same price point over and over. These tend to break down more often and there are much better breakout patterns to trade in our experience. A much more bullish breakout pattern is the high, tight flag when all the rules are met in our new video course.
Ascending triangles can even be good short opportunities. Of course, its important not to confuse the ascending triangle pattern with a rounding pattern back into the highs such as a cup with handle, small rounding bottom or J-hook pattern which tend to be more bullish.
The more choppy trading action you see with the ascending triangle tends to be more neutral for future price direction in our experience over the past 10 years trading top stocks.
The Descending Wedge
A lot of information sources online exclude the descending wedge pattern in their list of trading triangles. Yet this is one of the most bullish chart patterns on top stocks in our experience even though its often referred to as a wedge pattern instead of a triangle.
A good example of this pattern is NFLX which was featured in our alert service late last year. Here is a good example of a descending wedge.
We search for these on top growth stocks and UPOD stocks within very strong, long-term uptrends in a bull market. We want to see the tip of the wedge touching near a line that is drawn by connecting the lows in the trend over the past few years. Or, at least see a strong uptrend over the past year or more.
Within a long-term uptrend like this, the descending wedge is often a great swing trading opportunity. As the price of NFLX was reaching the entry point, the Nasdaq was bouncing strongly off of its long-term support line going back to 2009.
Our Entry and Exit Signals
The entry point is a close above the top trend-line in the wedge pattern. We will also often wait until it moves above that day’s high before entering the trade for more confirmation.
So we knew the long-term bull market in stocks had a good chance of continuing for now from a technical standpoint. Especially taking into account the fundamental factors at the time.
Of course, not all triangles will lead to a successful trade. HZNP is a stock that was recently featured to clients. This triangle gives a good example of one that is not working out so far and signs to look for that a trade is not likely to work out.
One of the things that happened after entering this trade is that administration drug policy changes were being announced and political candidates were announcing proposed changes to healthcare regulation. Both are bearish for drug stocks like HZNP – at least until the uncertainty over the changes has been cleared up.
One of the rules in our swing trading strategy is to sell on any significant negative news after entering the trade. So you could have stopped out around the technical entry point based on the new news. So far the price is hanging on to its uptrend support level but its more likely to fail at this point.
This is offering another good risk/reward ratio down here. We may start another trade if it breaks $23.80 and add if it gets off to a strong start and breaks $25.50. However, the whole industry is more liable to get hit with negative news as we enter a presidential election cycle.
Again, the ones that get off to a great start within a week or so are generally the big winners when swing trading our top strategies. So far, this one has been underwhelming.
Trading triangles are some of the best chart patterns to trade. The symmetrical triangle and descending wedge are 2 of our favorites on top stocks while the ascending triangle has been more tricky for us over time.
We have found much better breakout patterns than the ascending triangle while swing trading over the past 10+ years such as the high tight flag.
The descending wedge is a great trading triangle within a long-term uptrend but is not discussed elsewhere online as often in the context of triangle patterns. However, its one of our favorite chart patterns.
Of course, we focus on the top young growth stocks in the market along with UPOD stocks (under promise – over deliver on quarterly earnings results) when trading triangles. This gives us an edge. We also definitely want to see these patterns within a longer-term uptrend going back years ideally.
Trading Triangles with a Full Time Job
Another advantage to trading triangles on top stocks is that you can easily use the strategy with a full-time job. NFLX, EHTH, SCWX and UPLD soared 25% to 50% within a few weeks time after reaching the entry point.
You can just check the chart each day any time after work and the market close (4pm EST). With our strategy, you can just place an order any time between 4pm EST and 9:30am EST the next day. Whatever time is convenient for you after work.
You can day trade this pattern also but the much bigger moves generally occur in these larger patterns on longer time-frames on the better quality young growth stocks.
You can get started trading triangles today on a good simulator right now. Before risking real money on a new strategy, you can practice your triangle trading until you are confident using it in a bull market.