UP SLOPING PATTERN TRADE
By Ashton Maggs
As a market moves from a trending
INDICATOR REVISION phase to a sideways consolidation phase,
UP SLOPING TRIANGLES
traders must also adapt to changing market
The up sloping triangle is formed when a
horizontal resistance line is intersected by a rising
conditions. So long as there is direction in a
trend line. Price rise to the resistance level, where market, up or down, profits can be made
sustained selling forces the price back. Buyers can using simpler trend-trading techniques (by
bid less and still pick up stock. However, on each trading long or short depending on the
pullback, the fall is reduced. Buyers have to bid market direction). However, during sideways
slightly higher to get the stock. This creates the consolidation periods in markets, different
rising trend line as each new low is higher than the trading strategies (generally shorter in time)
previous one. When there are no more sellers at are often needed as an index fluctuates
the resistance level buyers have to bid higher to between a band or channel of support and
get stock. Often this means bidding substantially
resistance. Pattern trades are one technique
higher and the breakout takes place. This is a
strong chart pattern and breakouts from the last
that is used during sideways market
third of the triangle can be very powerful. conditions.
Here in the Australian market
(March/April 2010) we are caught in a prolonged sideways consolidation band/channel between
4,500 and 4,900/4,950. This has now lasted approximately six months. In hindsight it is easy to
see the market is „range-bound‟, but it is often at least two to three months before you can really
see that the index has moved from a trending phase to a sideways moving consolidation phase.
As at Thursday 1st April the S&P/ASX200 (XJO) had found support at 4,500 on four separate
occasions and resistance at 4,900/4,950 on three separate occasions (see chart below). As
Daryl has mentioned, “Dust off your old books about trading strategies for prolonged sideways
markets, such as through the 1970s”.
Range-bound markets generally mean shorter-term trading strategies have to be used,
such as pattern trades, momentum trades or channel trades. These can be challenging times
for traders and many make a decision to stand aside from the markets until a new longer-term
trend is in place. Others will adapt their trading strategies to the new conditions by:
Exiting trades on a single exit signal rather than waiting for a second confirming signal;
Trade both long and short using various trading instruments/accounts;
Only put 1% of their trading capital at risk compared to the normal 2%;
Work on a much shorter time frame (i.e. moving from trades lasting weeks and months
to those lasting days and weeks).
In times like these, the longer you are in the market the more risk you are taking on.
Following the S&P/ASX200 (XJO) chart below is an (now historical) example of a shorter-term
pattern trade set-up I identified in early March, 2010 (RIV). Given the current market conditions
at that time it was one of the few types of opportunities I was looking for.
RIV – Pattern Trade (Up-Sloping Triangle)
Order placed in the market after Wednesday night‟s close on the 10/3/10
• Capital Used: $20,001 (Total Capital $100,000)
• Trade type: Pattern Trade (Up-sloping Triangle)
• Attractiveness: Australian market ranging sideways between 4,500 and 4,900/4,950
over the past six months. With no real trending direction up or down in the market, we look for
shorter-term trading opportunities. An up-sloping triangle is one of these shorter-term tradeable
patterns with a defined target.
• Weight of Evidence: Well tested up-sloping trend line (three points make a trendline)
and three testings of resistance at $8.50. The higher lows are creating upwards pressure on the
stock and prices have a high probability of breaking up through resistance which has been
created at $8.50. Resistance is currently being tested for the mandatory third time.
• Buy-Stop Entry: $8.70 (Order placed above the market so that if prices never push up
through resistance at $8.50 our order is never executed. We want to see a clear break through
the $8.50 resistance level to put the probabilities further into our favour if our trade gets
• Stop-Loss Exit: $8.35 (Around 2% below the resistance level. If prices break up through
resistance at $8.50 then this level should reverse its role and act as support.)
• Total Cost/Shares: 2,299 shares at a total cost of $20,001
• Risk: $804 or 0.8% of total trading capital (2% maximum allowed on any single trade).
• Target: $11.09 (Height of the triangle placed at the current resistance level of $8.50.)
The break out could take days or weeks, but up-sloping triangle trades should break out
somewhere between halfway and 2/3rds of the way into the pattern. If prices continue sideways
towards the apex, the probabilities of a successful trade decrease and history suggests prices
will simply continue to meander sideways through the apex
• Potential Return: 27% or $5,495
• Return/Risk Ratio: 7:1 (3:1 minimum requirement)
• How the trade was found: Eyeball
10 Weeks Later…
Although after just four weeks RIV was halfway towards its target of $11.09, prices
slowly fell back below our entry level of $8.70 and halted at the $8.50 level, which was now
acting as a support level (after previously being tested three times as a resistance level). A
close eye was kept on price action and we were ready to exit if prices closed below our stop
loss level of $8.35. However, there was no end of day close below our stop-loss level of $8.35.
Thus we simply continued to stick to our trading plan and waited for prices to bounce away from
support at $8.50 and work their way back up towards our original target of $11.09.
14 Weeks Later…
With a very bullish rally occurring after prices rebounded from support at $8.50, our
target sell order, which was sitting in the market ever since the trade opened, was hit and
executed on the 26/6/10 at $11.09. This gave us a profit of 27% or $5,495 for a trade which
lasted just over 3 months. Once again, this outcome reflects the importance of trading discipline
and sticking to your trading plan. Whether we had to exit the trade with a small loss if prices had
indeed closed below our stop-loss level, or exit the trade once our profit target was reached,
both outcomes are to be considered successful trades. We do not cheer when we make a profit
or curse when we take a small loss. Trading is all about putting the probabilities in your favour,
not about certainty. Thus we keep a level head as we expect both profits and losses to occur as
we continue to trade and build up our experience.