There are several things you should understand before risking your money using this or any other method. The first is that no system or method works 100 percent of the time and you can be assured that there will be times when you do lose money. This system always trades with a stop loss order but the amount you lose may be in excess of your initial deposit as the use of stop orders may not limit your losses to the intended amount.
I have been successful trading this method but past performance is not necessarily indicative of future results. For all I know, this year may be remembered as “The year of the Triangle” and this method become totally ineffective from now on, but I seriously doubt it. Also, I have not traded every Triangle chart pattern you see in this manual and I make no claims as to how much you could have made because I have know way of knowing what the market conditions were at the time the Triangle formed. I don’t believe in promoting “hypothetical” trading results. They can be misleading because they often do not reflect certain market factors such as lack of liquidity.
What is Triangle Trading?
Triangle Trading is a trading method that is actually a combination of three different trading systems. It capitalizes on the primary strength and eliminates the primary weakness of both a Volatility Breakout and a Trend Following trading system and uses a recurring Cyclical tendency to improve our timing. The success of this method is based on the trader’s ability to recognize and act on a recurring pattern in all markets that often precedes a market trend. This method also eliminates one of the major hurdles of Futures trading and that is picking the markets direction. The trader need only determine that a significant trending move is about to occur in one direction or the other. This manual will show you how to determine this and also how to capitalize on it.
One requirement is that you have access to daily charts of the most common and actively traded Futures contracts. The trader must analyze his or her charts on a daily basis looking for a particular pattern called a symmetrical triangle, which I will define, in a later section. After the pattern is visually recognized, rules are applied to determine if in fact the formation is valid. Applying rules to our trading eliminates a lot of the subjectivity commonly associated with chart based trading and enforces discipline.
I have also included charts that represent actual examples of triangle formations that have recently occurred in the markets. Don’t trade with real money until you feel comfortable that you understand the principles involved with trading this method. The author assumes you have some trading experience and are familiar with intricacies of the different order types thus they will not be explained. After all, you pay your broker a commission for his assistance and I recommend using a full-service broker for the first 18 months of trading.
For those of you who like to get right to the point, the chart below shows an example of the Triangle Trading method applied to the Feeder Cattle market. The rules that define how this trade was selected and implemented are described in this manual. We will also discuss the most important and overlooked aspect of futures trading, the exit strategy.
The Problem with Volatility Breakout Systems
Periods of decreasing market volatility, as measured by price movement, often preclude major market moves as the market builds a “base” from which the next trending move will be projected. Volatility can be measured in a variety of ways but the “conventional” approach for trading volatility requires that you first select the method of calculating current price volatility. This measure is then compared to a previous time period to determine if the market is becoming less volatile (consolidating) or more volatile and potentially beginning a trending move as new fundamental information is absorbed by the market.
The problem with most mechanical volatility breakout systems is determining the scale of measure to use in determining if market volatility is expanding or contracting. Which previous period do you choose for your comparison, two weeks ago or two months ago? What is considered a breakout from this period of low volatility? A 10% increase or 50%? With all of these variables involved, traders often use the processing power of a computer system to test multiple combinations and determine which ones worked best in the past for a particular market. This is called “optimization” and is really the computers “best guess” at which combination of parameters will work best in this market at this particular point in time. If you run the “optimization” next week or on a different market, the answer will more than likely be different.
I believe the principle behind volatility trading is valid. Markets do tend to trade in ranges then expand on increased volatility to new trading ranges as fundamental information about the commodity changes. Often the markets “anticipate” this fundamental change and price it into the market before it even occurs. This is why you cannot wait for the information to become available and then decide how to trade the market. Always assume you are the least informed person, because you probably are, about the multitude of influences that are currently affecting market prices. Forget about the Wall Street Journal and CNN-fn, by the time they report the news event, the breakout will be over. Let the Market itself tell you what it wants to do in the form of your daily price charts.
I have not seen a trading system, other than the one I am proposing in the manual, that can effectively trade market volatility. It may sound as if I am against computerized trading systems when in fact that is only partially true. I am merely stating that you can trade futures without a computer generating the signals provided you have a workable trading plan and you have the discipline to execute it with unwavering precision. Due to the complexity in programming pattern recognition systems and the subjectivity required to interpret them, computers still cannot effectively recognize and trade some of the “time tested” patterns in market data such as the Symmetrical Triangle. Those systems will probably be available soon, so until then, use the information provided here in combination with the most powerful computer on earth, your mind.
Triangle Trading rules work the same in all markets and all time frames and if you’ve ever been in trading systems development, you know how important that is. This method not only tells you where prices should stay if volatility is considered decreasing but its time element also forecasts WHEN the breakout should occur. Don’t underestimate the huge trading advantage that this gives you over other traders.
Using this method, we let the market tell us that volatility is decreasing in the form of converging trend lines. The current intermediate market highs are unable to surpass recent previous ones and intermediate lows are also staying above recent swing lows. The market is now under both buying and selling pressure at either side of the Triangle. The RSI indicator begins to neutralize near 50 and market momentum comes to a halt. Essentially, the market is becoming a powder keg that will explode as the apex approaches and usually trend in the direction of the breakout. The market also tells us when the breakout should occur in the form of the Apex. Essentially we are doing what the market is telling us by its own actions.
The Trend is your friend, sometimes!
Statistics show that about 30% of the time markets are trending. The other 70% you are cursing the market for not continuing in the direction it started when your trend following indicator signaled you to take a position. Trend following systems attempt to enter the market at a particular price as soon as a “direction” is apparent. The entry signal is usually given after a significant period of market movement that is reflected in changes in certain indicators such as the 20-day moving average or the ADX. Traders view these changes as a positive sign that a trending move is developing and search for an entry point.
The Achilles Heel of Trend following methods is determining the entry point. You have no way of knowing if the current market movement will continue in the same direction or if you will get “whipsawed” as the market goes thru its normal gyrations. As the market momentum stalls or pulls back you begin to worry if it is a temporary correction or is the market trend reversing. Nervous traders panic and bail out, reckless traders become impatient and also exit in favor of more action elsewhere, aggressive traders figure the top is in and reverse their position. These traders all entered on a technical signal and exited on an emotional one. This same sad pattern is repeated every day, over and over, day in and day out. If you don’t believe me, ask your broker.
With Triangle trading, you are only in the market when a setup for a trending move has completed and we will use our advantage of precision timing to surgically remove profits from the market. Your stops are placed relatively close so if you are wrong, you don’t sit thru agonizing drawdowns wondering when (if) the trend will reassert itself. With Triangle trading, you are either right or you’re out, no in-between, no wondering. There are various methods you can use to limit your risk other than the stop orders and I will cover those as well.
Unfortunately, stop orders are useless against one of the primary causes of loss in this business, poor discipline. Traders sometimes relax their guard, usually after a winning streak and take a “flyer” trade on a recommendation from their broker or a friend. More often than not they end up giving back all or part of their profits.An important part of every trader’s ability to succeed is discipline.
Trading this method, you will not be in the market all of the time and you must become comfortable with that. There may be a couple of weeks in which you do not trade then there will be times when you will be in several positions at once. You do not need to trade every day or even every week to make money. You should only trade when the odds of winning are decidedly in your favor. You will know when it is time to trade because the markets will begin telling you several days to weeks in advance. The earlier you recognize that a Triangle pattern is forming, the more time you will have to plan and execute your trade. Spend 30 minutes per day looking at charts and stay alert. If you miss the breakout for whatever reason, don’t chase the market. Wait for the next opportunity, it is right around the corner.
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