I haven’t updated this blog since 2011, but I was recently
talking to a group of traders in Toronto and showing them screenshots of some
of my recent trades, and I fondly remembered my own blog!
So here’s one of my most recent trade: a GBP/USD long position
on the 1-hour chart.
This first chart shows the screenshot as the trade was
placed:
Back over a decade ago, when I was first taught Technical
Analysis under Paul Rodriguez of ThinkTrading.com, the continuation pattern was
taught as a key trade entry. We examined charts in his class without
indicators, and he said that a lot of traders look for market reversals to
enter because that’s where they think the big moves are; but it’s often where
they get whipped out even if they turn out to be right about the subsequent
market direction. However, continuation patterns are much easier to trade
because you’re not guessing market direction. That advice stuck with me:
continuation patterns are great entry points because the trend or direction has
already been established. You’re just looking to trade the established
direction.
This continuation pattern is a textbook example. I spotted it
at about 9:30pm ET, June 30, 2014. Earlier that day, the price had started to
trend up and break out of a previous range, helped by a large push due to a USD
news announcement at 10am ET. It then settled into a nice triangle.
That evening, other USD pairs had made similar pattern: a
breakout followed by a triangle. The reason I chose this pair is that there was
no previous resistance to speak of on the hourly or 4-hour chart. (In fact, the
GBPUSD had broken out into new highs not seen since 2009.) The other USD majors
had choppy areas or previous resistance in the recent past.
What else made this continuation triangle a textbook
example? Aside from no previous resistance, the size of the triangle was
relatively small compared to the previous push up. That means you can have a
tight stop and a high risk/reward ratio. People spot triangles all over the
charts, but they only have meaning when you put it into context of the rest of
the chart. Is the triangle preceded by a clear breakout or trend? I.e. is the
continuation pattern actually “continuing” something? And is it small relative
the previous push? A continuation pattern should be small because it should
represent a brief and small pause in the trend.
I placed a market order in the triangle with a stop-loss of
20 pips and a target of 35 pips. The risk/reward was 1.75. Because it was an
evening trade, I left my order in with the stop-loss and take profit. The trade
went about 11 pips against me, so about half my stop-loss, before moving up to
hit my target.
