Author: Triangular Price Correction
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Recommended Reading: How to Understand the Three Building Blocks for Trading Elliott Wave
USDMXN was a 5-year Triangle
Trading the Breakout after a Triangle Correction
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When Do Triangle Corrections Occur?
Triangles often occur before the last move of a current trend and rarely in the early part of the trend. However, that doesn’t mean you should start selling into a triangle breakout thinking it will trade lower. It likely will for a short period of time but triangle could have been a fractal part of the overall trend meaning the overall trend will resume much higher. When a triangle breaks as identified by the points below, it’s best to follow and or trade with the overall trend
How to Trade the Following Breakout
Once the overall trend has been identified as higher or lower and the trendlines have been drawn, we can look to where we can place protective stops and respective profit target ranges. Once a breakout has been identified, an entry in the direction of the overall trend can be entered with a stop set to be trailed below the final higher low of a triangle, or lower high in a bearish environment with a profit target determined by the width of the triangle or a prior trend measurement.
The width of the triangle is the orthodox target when trading triangle breakouts. However, another method is to look at the distance traveled earlier in the trend and look for an equal move. For example, EURUSD has just broken out of a triangle to print multi-year lows and we can use either the width of the triangle for a target or the distance traveled on the first leg of the downtrend that begin in May to June and use that as our target.