Textbook Triangle Trade Example in Crude Oil

Jun 30, 2011: 10:22 AM CST

When learning to trade certain patterns or trade set-ups, it’s best to start with “ideal” real-world examples to understand the logic of the set-up.

Doing so allows us to recognize similar patterns or set-ups in real time as they develop, which calls us into trading action (entry, management, exit).

Crude Oil recently (June 28) gave us an intraday “Symmetrical Triangle” pattern breakout that was a textbook example of the formation, trigger, target, and outcome of a classic Symmetrical Triangle pattern.

While I’m showing it on the 1-min chart, this basic pattern/set-up logic works on all timeframes (and markets).

Let’s take a look at the whole example:

Symmetrical Triangles are consolidation price patterns that give rise to a breakout trade set-up when price breaks through one of the two converging trendlines – usually just ahead of the apex (point where the two trendlines eventually meet to complete the triangle).

Price narrows down into equilibrium at the “midpoint” price as each swing compresses between visual trendlines into a point.

See my prior post on a Richard Wyckoff description of this type of situation – “Trading in Dull Markets and Breakouts.”

Once you observe this type of pattern in real time, you can prepare for a potential breakout trade.

The official trigger is a break and close above the upper descending trendline or under the lower rising trendline.

The aggressive entry is to position ON the breakout but many traders prefer using “prove it to me” conservative strategies such as:

  • demanding two or three bars close in the breakout direction
  • demanding the breakout form on higher volume (or momentum)
  • demanding price move one two ATRs (Ave. True Range) from the break

While we’re not seeing volume in this example, you can observe the 3/10 Momentum oscillator breaking out of a similar triangle compression pattern in the indicator, confirming the upside break.

If you’re expecting an upside breakout, there are two logical places to locate your stop-loss should the breakout become a trap:

  • Conservatively – just under the Midpoint of the pattern (horizontal line)
  • Aggressively – under the low of the rising trendline

The target is your classic Edwards and Magee (or Richard Schabacker) projection:

  • A “Measured Move” of the Height of the Triangle added to the Breakout Price

In this case, we had an initial choppy breakout but the buyers stepped in as price took out the prior swing high at $92.20 which created a “Feedback Loop” which powered this trade to the upside target near $93.00.

Feedback Loops form when buyers happily enter new positions while bears/short-sellers unhappily cover shorts for stop-losses (buying).  Feedback Loops give power to Breakout Trades like this.

Finally, as price reached its upside “pattern” projection, we observed negative divergences in the momentum oscillator (a non-confirmation of the upside move) and then price triggered the official exit by breaking down under the rising short-term trendline into the target.

The real world won’t be as clean as a textbook example, but you have to form a baseline for comparison for what to look for and what to expect in a trading opportunity.

When you see examples as clean as this, study them and make a reference for your education – the more you see these types of patterns/set-ups, the better you’ll be to recognize them in real-time and thus trade the pattern with confidence.

Corey Rosenbloom, CMT
Afraid to Trade.com

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5 Responses to “Textbook Triangle Trade Example in Crude Oil”

  1. market internals question.... Says:

    I've been watching the 'market internals' on SPX as per your advice. 

    This run up seems to have started with positive divergence with TICK (15 minute charts) and a break to the upside on 6/27.  Since then we've run straight up. 

    There is negative divergence with TICK, NYSE Advance-Decline Volume, and NYSE Advance-Decline Issues. 

    But we continue to climb higher with no breakdown that will hold (yesterday's slight break under support did not hold).

    My question is: considering that this run up started with ONLY positive divergence with Tick on 6/27 but no positive divergences using the other market internals indicators, does that decrease/undermine the stability of this rally?  

    Truthfully, the rally has been very strong thus far without the other corroborating internals' display of positive divergence… so I'd predict that the answer is 'the other internals are not required for a stable rally'.   But I look forward to your answer. 

  2. Corey Rosenbloom, CMT Says:

    Excellent question and good thinking.

    The decline into June 16th's low was indeed undercut by the big three forming positive divergence followed by a “Kick-off” confirmation signal on June 21 (arguably a stronger signal June 14th).  TICK (highs) clearly undercut the current 4-day rally but Breadth/VOLD have been marginally higher.  I described it as “neither a confirmation nor a confirmation” in last night's report and still there's upside follow-through this morning.

    Short answer is I'm hearing a lot of this is end-of-quarter buying/positioning (affectionately called “window dressing”) so we'll see what transpires as we roll into the next quarter ahead of the July 4 holiday. 

    Ultimately, internals give you clues “under the hood” as to the strength/weakness of a move in progress just as volume does.  Recent experience shows that markets can rally (swing) higher than we think on declining support (internals and volume) but the longer the divergence lasts, the more violent the snap-back tends to be. 

    I need to do a public update on internals and you might have inspired that post!

  3. market internals question.... Says:

    Great insights. Thanks for the quick reply. Looking forward to catching the next down turn… will wait patiently for the break.

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  5. Oil Trading Says:

    Oil Trading is one of the most highest trading in the stocks. We should stop the negative divergence.