Trading is much about identifying support and resistance levels on the right side of the chart based on what happened on the left side. Using the market made patterns in order to open or close a trade.
Having said that, technical analysis is full of reversal or continuation patterns, but finding solid support and resistance levels should be the key of any successful trader.
When it comes to support and resistance, these can be either dynamic (the area that offers support or resistance is not a fixed one) or static (classical). Both of them are equally important and while the previous article dealt with dynamic support and resistance using the Pitchfork tool, this time we’ll look at the classical horizontal support and resistance level given by a simple pattern, a triangle.
A triangle has no more no less than five different segments (or legs) and it can be either contracting or expanding. The nature of the triangle is given by the angle of the two trend lines that are defining the triangle. If they converge to a common point on the right side of the chart, the triangle is said to be contracting, while if they meet on the left side of the chart, the triangle is an expanding one.
The intersection point of the two trend lines is being called the apex of a triangle and it is offering a great deal of support and resistance for future price action. The thing to do in this case is to find the intersection point and simply draw a horizontal line as that will mark the future area of support and resistance.
The example below shows the USDJPY daily chart and the triangle in question is a contracting one, meaning the apex is to be found on the right side of the chart. This triangle broke higher at the start of 2015 so from that moment of time we should have been able to correctly find the apex.
Drawing a horizontal line through the apex gives an area of future support and resistance where price should hesitate with its advance or decline.
In this case, it took the market three times until the support was been broken and this tells much about the power of such an area offered by the apex. Moreover, the support level was not being broken for more than a year after the triangle was completed but after two bounces, the market violently went through.
It is being said that a support level, once broken, is going to be retested and therefore turn into resistance. That is true most of the time, but one should take it with a grain of salt in the sense that it is not mandatory.
The USDJPY example from above indeed broke the support lower and now it should be retested, as support turned into resistance. So far, no retest came but if it is coming, then bulls should close any longs as the apex will act as a powerful resistance from this moment on.
Depending on the time frame the triangle is identified on, the area of support and resistance offered by the apex is more powerful or not. It goes without saying that the bigger the time frame is, the stronger the support and resistance areas will be.
Such triangles (like the one shown above) also have a measured move and the trader is not only able to spot the future support in this case, but also to trade the break of the triangle to the upside. This goes into a different category of technical analysis though, not related to the subject of this article.
Not all contracting triangles have an apex that can be used, as in order to use it, it must form relatively closer to the triangle. Some triangles that have no measured move actually have almost equal legs and therefore, if you try to draw the trend lines and to find the converging point, you’ll find out that it is forming somewhere on the very distant future as the two trend lines are almost parallel.
However, most of the times the apex can be used in the manner shown here and this is just another trading tool any technical trader should use.
Our next article here on ForexGator.com will show how to use moving averages in order to add to a bullish or a bearish trend and how to spot reversals.