A basic guide on how to play the descending triangle breakout.
Works Referenced: (Kirkpatrick and Dahlquist, 2010, p. 315) (Bulkowski's Descending Triangles, 2005)
Kirkpatrick and Dahlquist state that descending triangles breakout to the downside 64% of the time (2010, p. 315). But "Price Breakout Down: Price fails to gain at least 5% from breakout 16% of the time; the average maximum gain from shorting before any 20% reversal upwards is 16%."
So the conclusion we can draw is that the downward triangle breakout even happening 64% of the time, does not bring big profits and has a higher risk for the operation.
"Price Breakout Up: Price fails to gain at least 5% from breakout only 7% of the time, the average maximum gain before any 20% decline is 47%."
Considering a breaking up, even happening in only 36% of the time, when occurs brings greater profits and a safer trade.
In this way, it is preferable to play in descending triangles aiming only to break up!
In the chart above you can see the two classic options of entry into breakout, I use that red bar as safety margin for the breakup, that is in case the price exceeds the red bar, I consider the breakup valid, this serves to avoid false breaks.
The first entry option is in the breakout, it is a good option that most of the time brings good profits, however it is necessary to leave a bigger stop-loss because of the risk of pullback.
In the second option, the Pullback is the perfect entry according to most books, because it is where the trend consolidates making the first ascending bottom and also allows us to use a very short stop-loss which greatly increases the risk x return ratio.
And how to set a "perfect" target? Bulkowski (2008) suggests the following breakout price targets for the descending triangle: Descending Triangle Breakout Upward: Breakout Price + ((Highest Price in Triangle - Lowest Price in Triangle) * 84%)
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Komentarz
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Hey, its not a trader at all, its just a Educational Content about a triangle pattern. If you want to see my trade on BTT, check here:
In your equation "Breakout Price + ((Highest Price in Triangle - Lowest Price in Triangle) * 84%)". What determines the breakout price? The price that it reaches after the initial breakout, or the price it pulls back to and settles at after the breakout?
LiuTrader
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@mikewall, the price that it reaches in the initial breakout, first candle after the red bar.