Market side: Futures trading basics

LESSON 23: TRIANGLE FORMATIONS

Marty Hibbs, Grain Merchandiser, Grain Farmers of Ontario

This monthly educational series will feature the basic workings of the futures and options markets and how they can be utilized to help farmers with risk management.

THIS LESSON WE will discuss the ascending triangle formation and how to trade it.

The ascending triangle is a bullish formation that usually forms during an uptrend and they are typically a continuation pattern.  A bullish pattern indicates that the price of the security will go higher upon the completion of the current move or trend. The ascending triangle pattern is formed by two trend lines. The first is a flat or a horizontal line and below there, a rising lower line. Because of its shape, the pattern can also be referred to as a right-angle triangle. The price of the security moves between these two trend lines until it breaks out to the upside. The breaking of the upper line indicates the completion of the base and signals a bullish trend. Though the ascending triangle usually appears in an uptrend and is considered a continuation pattern, sometimes it may appear in a downtrend. Therefore, it is not unexpected to see an ascending pattern develop at the end of a downtrend.

HOW TO TRADE AN ASCENDING TRIANGLE FORMATION
As the lows of each bar continue to move higher towards the flat top of the angle, the pressure mounts until the price finally breaks through the upper flat surface in the direction of the current move.

Once this upper level is penetrated, the price moves higher as the flat surface is now a support level instead of the resistance level that it was before the breakout. A basic tenet of technical analysis is that resistance turns into support and vice versa.

There are many ways to play this formation, but I find the best way is to wait until the break is confirmed by a close above the flat line. Once that is achieved, I would be comfortable to enter the long side of the trade with a stop below the bottom of the ascending side of the triangle.

The image below shows the strategy that I personally would use.

Finally, there is a method that I use whereby I wait for the confirmation of the breakout and a close above the flat line and then wait patiently for a move back to the breakout point. This is a test of the support but many times we do not get the opportunity of such a pullback and thereby miss the move.

Once the breakout has occurred, the price projection is found by measuring the widest distance of the pattern and projecting the distance to the breakout point.

Next lesson we will look at the descending triangle and how to trade it.  •

Marty Hibbs is a 25 year veteran futures trader, analyst, and portfolio manager. Hibbs was a regular guest analyst on BNN for four years. He is currently a grain merchandiser with Grain Farmers of Ontario.

Lesson Definitions:

Breakout: refers to a move through an area of support or resistance on a chart. The key to this term is that the breakout, to be successful, should stay through the area in question.

Pattern catgories: pattern types are grouped into several categories based on their behaviour or the method that is used to detect the pattern. Examples of pattern categories are bullish, bearish, classic, short-term, continuation, and reversal.

Pattern duration: the number of days or bars over which the pattern formed. Pattern duration is equivalent to pattern length. In searching for technical events, one may specify the pattern duration in days. Longer duration patterns generally forecast price movement over a longer period of time. For example, a 90-day pattern anticipates price movement over the long term, compared to a shorter-term 30-day pattern.

DISCLAIMER: This information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by the author, by Grain Farmers of Ontario, or by any other person as to its accuracy, completeness or correctness and Grain Farmers of Ontario accepts no liability whatsoever for any loss arising from any use of same.

About Marty Hibbs 29 Articles
Grain Merchandiser, Grain Farmers of Ontario