Triangle patterns form when price action oscillates between support and resistance levels and consolidates in the process.
On the historical 4 hour chart of the GBPJPY below, you can see how price begin to consolidate and “coil up” between support, the lower black line, and resistance, the upper black line. Think of it as a spring being compressed. Eventually, at some point, that spring (price action) is going to be released and a breakout will take place.
The candle labeled “entry candle” is currently just above the resistance line of our triangle pattern. If this candle closes above that resistance line, that will be our entry signal. If it does not, we will continue to bide our time for either a bullish or bearish breakout from the pattern.
Sidebar: A handy tool to use to know how long it will be before a candle closes is the “Show Time to End” indicator in the upper left hand corner of the chart. We can see that the current open candle will close in 3 hours, 9 minutes and 29 seconds.
(This tool can be added to any Marketscope chart by right clicking on the chart itself, select “Add Indicator”, scroll down to “Other”, select “Show Time to End” and then click OK.)
If the entry candle does in fact close above our resistance line, we could enter the trade long with a stop just below the support line in the area labeled “stop” in red. In the case of a downside breakout the stop would be placed above our resistance line.
Limit (Take Profit) Placement:
When you look at the far left side of the triangle where the pattern begins, you will see a green line with arrowheads at either end. In the case of any triangle pattern, that distance can be used to roughly determine the distance that price will travel after the breakout occurs.
The green line just to the right of the entry candle is the same length as the one discussed above. In the case of a bullish breakout we would place that line (or simply determine the number of pips it encompasses) as we see it on the chart and set our limit around the top of that line. (A more conservative trader might set the limit just below the top of the limit line to increase the likelihood that the limit would be triggered.)
In the case of a bearish breakout, we would reverse the above process and place the line below support at the point of the breakout.