Two Examples of How to Project Price Targets from Triangles

Feb 19, 2010: 11:54 AM CST

I wanted to share two recent, clear examples of how to project a final price target to play for from a symmetrical triangle pattern formation.

First, let’s start with gold prices daily in late 2009:

Here is how most chartists project price targets from triangle patterns.

First, observe a symmetrical (or other type of) triangle, which is a price consolidation pattern that moves towards the apex – breakout point.

Second, once you see price cleanly/clearly break outside the upper or lower trendline (usually with strong range expansion candles), then measure the height of the triangle by drawing the trendlines back to where the pattern started and measuring that price distance.

You can do this in advance of the breakout.  In this case, we drew the upper trendline back to encompass the January 2009 price low and found that the distance between the trendlines was roughly $200 per ounce.

Finally, add the height of the triangle to the breakout price to arrive at your target to play for.

In this case, the breakout occurred at the $975 level, so we added $200 to that price to arrive at a final target of $1,175.

A trader would have placed a stop on the opposite side of the trendline (the $925 level) and exited at the $1,175 target, or if the target was not met, on any clear sell-signal (such as the clean break of a moving average… sort of a trailing stop strategy).

This method is the ‘classic’ way as taught by Edwards and Magee, Thomas Bulkowski, and others.

As you see, price slightly exceeded the target but then plunged not long after.  The edge in pattern trading often comes from the larger target in relation to the stop (in this case, a roughly 4 to 1 ratio).

Here is an example from last night’s Idealized Trades daily report.

Next, to show how the concept applies on all timeframes, we will see the SPY 5-min chart from February 18, 2010:

Without going into as much detail as above, we see the clear compression in price in the morning, leading to the noon CST triangle breakout at the $110.35 level.

Extending the upper trendline back to where the triangle began, we see a height of roughly $0.65 cents.  Added to the breakout of $110.35, we see a price projection target of $111.00 (also round-number resistance).  The stop would be under $110.25.

Price formed two ‘upper shadow’ candles at this zone, fell in a sharp bar (traders were to exit near the $111.00 level if trading this pattern), but – like gold – the price slightly exceeded the target before falling into the next trading session (on news of the Fed’s surprise rate increase on the Discount Rate).

Use these two examples of references of the classic pattern and how to trade this set-up.  It won’t always work in text-book fashion, but the edge is in the risk-reward relationship, and the “Range Alternation” principle.

Here are a few prior posts that walk us through the Gold Triangle as it occurred:

A Look at Gold Prices Year to Date – 2009

60-min Internal Look at GLD/Gold” (also a triangle break pattern)

Sep. 3:  “A Look Inside the Gold/GLD Daily Triangle Break

Aug. 30:  “Gold Nears Apex of Triangle Pattern

Aug 21:  “The Current Contracting Triangle in Gold

Aug. 2:Two Competing Weekly Patterns in Gold

July 27:  “Gold Forming Symmetrical Triangle – Waiting for Breakout

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

8 Comments

8 Responses to “Two Examples of How to Project Price Targets from Triangles”

  1. terlyn Says:

    It worked this morning on a short-time triangle in the dollar, which moved up exactly to the measured move. Since plunged. So how do you measure/know the move after the triangle breakout target is met?

  2. Corey Rosenbloom, CMT Says:

    It's always neat to see price react in that way!

    There's no edge – at least in the pattern projection sense for targets – once a target is met. The edge evaporates (those in the position will take profits while others might aggressively short) but that is not guaranteed, so it's often best to stand aside. Perhaps look to Fibonacci retracements, but there's no price projection mechanism once a target is reached (same with a flag or head and shoulders).

  3. terlyn Says:

    Yes, it was really neat. I couldn't believe how exact it was. Thanks for the rest.

  4. terlyn Says:

    It worked this morning on a short-time triangle in the dollar, which moved up exactly to the measured move. Since plunged. So how do you measure/know the move after the triangle breakout target is met?

  5. Corey Rosenbloom, CMT Says:

    It's always neat to see price react in that way!

    There's no edge – at least in the pattern projection sense for targets – once a target is met. The edge evaporates (those in the position will take profits while others might aggressively short) but that is not guaranteed, so it's often best to stand aside. Perhaps look to Fibonacci retracements, but there's no price projection mechanism once a target is reached (same with a flag or head and shoulders).

  6. terlyn Says:

    Yes, it was really neat. I couldn't believe how exact it was. Thanks for the rest.

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