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================ Trading Rules Series - Triangles
Rules for Triangles:
It is better not to trade minor swings within a triangle unless the triangle is very large. As a triangle grows older, swings become more narrow. Profit potential shrinks, while slippage and commission costs grow.
1. To trade inside a triangle, use oscillators such as stochastics. This can help you catch minor swings.
2. In trying to decide whether a triangle on a daily chart is likely to lead to an upside or a downside breakout, look at the weekly chart. If the weekly trend is up, then a triangle on the daily charts is more likely to break out to the upside, and vice versa.
3. When you want to buy an upside breakout, place a buy order slightly above the upper boundary of a triangle. Keep lowering your order as the triangle becomes narrower. To short a downside breakout, place a sell order slightly below the lower boundary. Keep raising it as the triangle becomes narrower. Once you are in a trade, place a protective stop slightly inside the triangle. Prices may pull back to the wall, but they should not return deep inside a triangle following a valid breakout.
4. A valid breakout should have a burst of volume, at least 50% above the average of the past 5 periods.
5. When a breakout from a triangle is followed by a pullback, pay attention to volume. A pullback on heavy volume threatens to abort the breakout, but a pullback on light volume offers a good opportunity to add to your position.
6. If volume increases on a rally toward triangle's upper boundary, an upside breakout is more likely. If volume increases while prices reach lower boundary, a downside breakout is more likely. Volume typically shrinks as triangles get older.
7. When prices approach the last third of a triangle, cancel your buy
or sell orders. Breakouts from the last third of a triangle are very unreliable.
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