How to Trade Breakouts Using Trend Lines, Channels and Triangles?
Once you start getting used to the signs of breakouts, you’ll be able to spot good potential trades fairly quickly.
By now you should be accustomed to looking at charts and recognizing familiar chart patterns that indicate a reversal breakout.
Here are just a few:
- Double Top/Bottom
- Head and Shoulders
- Triple Top/Bottom
In addition to chart patterns, there are several tools and indicators you can use to supplement your case for a reversal breakout.
The first way to spot a possible breakout is to draw trend lines on a chart.
To draw a trend line, you simply look at a chart and draw a line that goes with the current trend.
When drawing trend lines it is best if you can connect at least two tops or bottoms together. The more tops or bottoms that connect, the stronger the trend line.
So how can you use trend lines to your advantage? When the price approaches your trend line, only two things can happen.
- The price could either bounce off the trend line and continue the trend.
- The price could breakout through the trend line and cause a reversal.
We want to take advantage of that breakout!
Looking at the price is not enough however. This is where using one or more of the indicators mentioned earlier in this lesson could help you tremendously.
Notice that as EUR/USD broke the trend line.
Using this information we can safely say that the breakout will continue to push the euro down and as traders, we should short this pair.
Another way to spot breakout opportunities is to draw trend channels.
Drawing trend channels are almost the same as drawing trend lines except that after you draw a trend line you have to add the other side.
Channels are useful because you can spot breakouts on either direction of the trend.
The approach is similar to how we approach trend lines in that we wait for the price to reach one of the channel lines and look at the indicators to help us make our decision.
EUR/USD broke below the lower line of the trend channel and re tested. This would’ve been a good sign to go short!
Our goal is to position ourselves when the market consolidates so that we can capture a move when a breakout occurs.
There are 3 types of triangles:
- -Ascending triangle
- -Descending triangle
- -Symmetrical triangle
Ascending triangles form when there is a resistance level and the market price continues to make higher lows.
This is a sign that the bulls are slowly starting to gain momentum over the bears.
The ascending triangle is that each time the price reaches a certain high, there are several traders who are convinced about selling at that level, resulting in the price dropping back down.
The result is a struggle between the bulls and bears.
What we are looking for is a breakout to the upside since ascending triangles are generally bullish signals. When we see a breach of the resistance level the proper decision would be to go long.
The third type of triangle is the symmetrical triangle.
Rather than having a horizontal support or resistance level, both the bulls and the bears create higher lows and lower highs and form an apex somewhere in the middle.
Unlike the ascending and descending triangles which are generally bullish and bearish signals, symmetrical triangles have NO directional bias.
You must be ready to trade a breakout on either side!
In the case of the symmetrical triangle, you want to position yourself to be ready for both an upside or downside breakout once it s break wait for the re test on the trend line and take the long or short position.
Breaking down the Triangle Breakouts
Descending triangles usually breakout to the downside. So when you think of descending triangles, think of breaking out on your chin.
Symmetrical triangles can break either to the upside or the downside. So when you think of symmetrical triangles, think of breaking out on both your chin and forehead.