What Is Decreased Volatility Breakout? (Part III)

By Ahmad Hassam

Each triangle type has its own directional bias. Ignore any first breakout attempts whether it is to the upside or the downside when you trade triangle breakouts. Get ready for a breakout when you have identified the triangle formation on either the daily or weekly chart. There can be three possibilities when you try to trade the decreased volatility breakout strategy.

Possibility#1: Dont forget, ignore the first breakout. The second breakout attempt is in the direction expected of the triangle type. In other words, the second breakout attempt is in the upside direction for an ascending triangle and it is in the downside direction for the descending triangle. This breakout could signal either the continuation of the existing trend or the trend reversal.

For an ascending triangle make sure each side of the triangle gets touched two times at least. Place a stop buy order at least 10 pips above the horizontal resistance level to capture the potential upside breakout. Place a stop loss order 10 pips below the horizontal level of the triangle to protect against false breakout. Set profit target according to your time frame.

For a descending triangle, place a stop sell order 10 pips below the horizontal support level to capture the potential downside breakout. Place a stop loss order 10 pips above the horizontal support level. Again make sure the triangle is touched two times before the breakout.

Possible Case No 2: The second breakout is to the upside in case of the descending triangle. Similarly it is in the downside in case of an ascending triangle. Again ignore the first breakout attempt. In other words, the second breakout attempt is in the opposite direction of the expected triangle type breakout direction.

In case of an ascending triangle, since the breakout direction is opposite to the most expected direction, cut the position size to half for this trade in order to reduce risk. Set stop sell order at least 10 pips below the upward sloping trendline in order to capture the expected downside breakout. Ignore the first breakout attempt and make sure the triangle is touched at least two times. Place the stop loss 10 pips below the breakout point.

In case of a descending triangle, place a stop buy entry order at least 10 pips above the downward sloping trendline in order to capture the potential upside breakout. Again reduce the position size to half in order to reduce risk. Place stop loss 10 pips below the breaking point and set your profit target in accordance with your time frame.

Possibility #3: In case of symmetrical triangles, there is an equal possibility of upside as well as the downside breakout. Just follow the above guidelines and place stop buy entry order or the stop sell entry order 10 pips above the downward sloping trendline or 10 pips below the upward sloping trendline. Similarly set your stop loss orders. - 23196

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading stocks and currencies. Develop your own Forex Trading System. Learn Forex Trading !