One of my favorite breakout trading patterns is the Triangle, and GoPro (GPRO) just gave us three back-to-back-to-back intraday examples of this set-up.
Let’s take a look at these patterns and learn specifically how to recognize and trade this pattern.
Let’s focus on the three highlighted triangle patterns step-by-step.
First, a Triangle develops when price compresses or overlaps (bounces between) two hand-drawn trendlines.
After the compression (consolidation) develops, price tends to break out of the consolidation, allowing traders to step into the impulsive (one-directional) price action for a quick profit.
Think of the compression like the coiling of a spring and the breakout as the energy released after the ’squeeze.’
It may be easier to take a closer look at the most recent intraday “spring breakout” pattern in GPRO:
While we’re seeing two examples above, lets’ just focus on the Triangle and Breakout on March 17th.
At the beginning of March 17, price powered higher impulsively into the $ 41.00 per share target level and then buyers and sellers reached equilibrium – balance – which showed up as a triangle on the chart.
The goal is to recognize the triangle, await the breakout trigger, and jump into the market (in this case with a short-sell position) when price does break and close (5-min bar) under the lower trendline.
When filled, place the stop above the upper (falling) trendline – in this case above $ 41.20 – and play to capture the “spring” or breakout impulse as price shoots out of the consolidation trendlines.
The stop will protect you from a “Trap” outcome where an initial break occurs yet price rushes back inside the consolidation and breaks out the other side.
You can plot a target just by measuring the height of the triangle and subtracting that – in this case roughly $ 1.00 – from the breakout.
For quick math, $ 1.00 subtracted from the $ 40.80 breakdown gives us a target of $ 39.80 for which to play.
In this case, shares slightly overshot the target before reversing – off a positive divergence – from $ 39.50.
Target achieved – trade done – happy profits.
That’s the theory at least. Real-world experience will be a better teacher for you than theory.
Continue studying the popular trade set-up and apply this to your growing toolbox of trading knowledge.
Follow along with members of the Daily Commentary and Idealized Trades summaries for real-time updates and additional trade planning.
Corey Rosenbloom, CMT
Afraid to Trade.com
Follow Corey on Twitter: http://twitter.com/afraidtotrade