Triangle Trading
Duke Heberlein is on vacation this
week. This column was written by Michael Brooks
Over the past week,
we looked at descending triangles several
times. Today there have been many ascending triangles
coming across the
TradersWire. This is the same concept, except the bias is to the upside as
opposed to the downside for the descending triangle. The following alert came
across the TradersWire this morning:
10:39:54
New Century Financial Corp
(
NCEN |
Quote |
Chart |
News |
PowerRating) is forming an ascending
triangle on its intraday chart.
The stock is trading above its 50-day moving
average and is showing relative strength against a weak market. A break above
its trend line will be a positive. NCEN is up 1.28 at 26.90.
Take a look at the above chart. The first thing you want to determine is your
risk/reward for the trade. Measuring the height of the triangle you get about 75
cents as a potential reward target. What is your risk? It really depends on the
individual style of a particular trader and where they might determine a logical
stop should be placed. One logical point for a stop placement would be below the
lower trendline of the triangle. In that case, your risk would be about 25
cents. This gives you a 3 to 1 risk/reward ratio and you take the trade
on a break above the top of the triangle.
Once in the trade you either trail your stop or partial out as profits
accumulate. Yes, if you partial out before the target is reached you will not
get an exact 3 to 1 risk/reward. That is OK. The real point is to make sure you
have more upside potential than downside on every trade you enter. Trading is
not an exact science.
The above chart was a clear winner to help make my point. Of course, all your
trades will not be winners. But if you always make sure you have a lot
more to gain than lose in any trade, you will greatly increase your chances of
becoming a consistently profitable trader. It doesn’t have to be any more
complicated than buying ascending triangles and selling descending triangles.
Keep it simple.
Have a great weekend!