Swing Trading Methods – Descending Triangle Analysis
Triangles Are Considered One Of The Most Reliable Swing Trading Methods
Today I’m going to review one of the most reliable swing trading methods for trading overbought market conditions. Over the last few years I noticed that many traders avoid selling short. This is a big mistake because it prevents you from capitalizing on some of the best trading opportunities that come around just as often as long trading opportunities with one exception.
Markets Drop On Average Three Times Faster Than They Rise
Aside from numerous studies and back testing results, you simply have to visually look at the markets to notice that most financial markets drop much faster than they rise. The reason for this is simple; markets are driven by fear and greed and fear produces a stronger emotional response in people than greed. Take a look at the following chart and you will see what I mean.
In case you’re wondering this doesn’t apply only to stocks but to most financial markets such as commodities, futures and currency markets. If you look at this chart of the Canadian Dollar you can clearly see that it drops substantially faster than it rises.
Anatomy Of Descending Triangle
The descending triangle is one of the most basic technical analysis patterns that were introduced in publication over 60 years ago. The pattern in considered a continuation pattern and resembles a narrowing triangle with a horizontal line of support beneath the market and a descending trend line creates a resistance level above market action. You can see from this example exactly what the descending triangle looks like visually.
Another example of a descending triangle chart pattern. Notice once again how highs get lower and the lows bounce off the same price support levels consistently. These two examples should help you find descending triangles for short term trading opportunities.
How Do You Trade These Patterns
Now that you have a good visual idea of what to look for when analyzing descending triangles, I’m going to show you how to correctly trade these patterns. The first logical step is to isolate the entry point so that you know exactly where to enter the market. The Entry Point is the closing price of the first bar that trades completely below the bottom resistance level. You would have to monitor the market you are trading and enter a MOC (market on close) order when you see a daily bar that’s completely outside of the trading range. Most brokers accept market on close orders. The only caveat is you have to make sure that the last few minutes prior to the closing bell the market doesn’t rally quickly back into the support area, especially close to market closing when stocks and other markets enter their second most volatile period of the day.
Here is another example so you can see how to correctly enter the trade set up. Remember you always want to enter a MOC (market on close) order immediately prior to closing. If you enter it early the market may rally and trade inside the triangle once again. If the market does trade back inside the triangle after trading completely outside of the triangle but before you enter the order the trade is nullified.
Where To Place Stop Loss Order
The next step is to locate a strategic area for your stop loss level so that you don’t get stopped out due to a random market swing. Often-times traders use stops that are too tight and get stopped out prematurely. The best place to place protective stop loss levels when trading triangles is inside the actual triangle. I place my stop loss level immediately above the 2 of the last bars that traded inside the triangle. I always pick the highest of the last two bars. You can see by looking at the chart exactly where my stop loss placement area is located within the triangle.
This is another example of a stock that just broke below the support level where short entry was triggered. Always remember to place your buy stop (it’s a buy stop because you’re going short) above the higher of the two bars that are inside the triangle.
I hope this short tutorial gave you a good perspective on descending triangles trading patterns. Next time I will cover profit targets and show you how to calculate your profit targets when trading descending triangles as well as other swing trading methods.
Always remember to place your stop loss order immediately after you are filled on your entry and don’t forget to enter your entry order as a MOC (market on close) order immediately prior to the closing the first day the market trades outside of the triangle.
For more on this topic, please go to: Short Term Trading Techniques – Create Short Term Trading Strategy and Learn Swing Trading Strategies – Important Tips For Short Term Traders
That’s it for today’s tutorial,
all the best,
By Roger Scott