• Trading Information - Buying Into a Pullback
• The Equilateral Triangle
• Trading Chart Patterns
• Share Purchase Plans
• Yellow Cake…Anyone?
• Read the tape – it can tell an interesting story

The formation is quite simple with the upper trend line sloping downward while the downward trend line slopes upwards. The lines represent a contracting trading range where the pull between buyers and sellers becomes more intense. Ultimately, one will overcome the other and prices can break in the relevant direction with a degree of velocity. One analogy that could be used is a game of tug of war. For some time both sides are applying equal pressure. As pressure builds, one side gets the upper hand and momentum starts to swing until ultimately, one side gets exhausted and lets the rope go. The other side crashes to victory.

An example in Mount Gibson Iron (MGX) below

Although the majority of research into this pattern suggests the trend gives very little evidence on what way prices are likely to break, I believe trend is a key element in the sustainability of any move. In an up trending market, the side going with the trend has a higher probability of overcoming the side going against the trend over time. Furthermore, research shows that the pattern has a reliability of about 70% and when combined with a strongly trending market, moves can often be magnified.

The main strength of trading triangles comes into play when looking to set predetermined trading levels. The entry and target levels are defined by the pattern while a stop loss can be set using a number of options which we’ll discuss shortly.

Pacific Brands (PBG) is a trade we recently suggested on a break from the equilateral triangle that had formed between August and October. The breakout level occurred at $1.20 whilst the pattern offered an initial price target of $1.50. The target is projected upwards using the depth of the initial triangle. In this case, the depth was 30c. Notice the rise in volume on the breakout day.

Setting up risk management parameters is an individual consideration for each trader however the common theme should be discipline in adhering to you’re predetermined strategy. Some traders use a break of daily lows to place stops, some use a stop based on volatility such as an Average True Range and other use moving averages or support and resistance levels. There is no one strategy that works all the time however I’ve found volatility stops triggered on a close below show merit.

By looking for equilateral triangles in the market, we’re essentially looking for stocks consolidating. If we combine this with a trend filter, such as the 50 day moving average today is higher than it was 50 trading days ago, and look for buyers that are overcoming sellers (close – open > high – close) we can begin to construct the foundation for a trading strategy around equilateral triangles that puts probabilities in our favour.