Triangles can be characterized as areas of indecision. Typically, the forces of supply and demand at that moment are considered nearly equal. Each new top and bottom is confined within a trading-range, the debate area. Eventually, this indecision is resolved and prices usually breakout of this formation to the upside or downside (often on heavy volume). In our example below, we demonstrate a bearish triangle breakout strategy.
As the downside is potentially limited by the target area (123 19/32), a bear spread allows you to lower the cost of the strategy (in comparison to a straight long put) by selling a put out of the money. As a result, the strategy consists of the simultaneous purchase of a put with a strike of 125 and the sale of a put with a strike of 124 for a net debit.
|Trading Symbol||OZN H7|
|Trading Symbol||OZN H7|
|Trading Symbol||ZN H7|
|Entry Point||125 5/16|
|Stop Loss||126 1/8|
|Contract Expiry||Mar 2017|
A target of 123 19/32 is calculated by finding out the new measured move down triggered by the triangle’s breakout - previous down move reported from the triangle’s confirmation - dotted arrows. A less aggressive target can be set by anticipating a measured move from the pattern’s high to the pattern’s low (first red line).
Once the position is opened, if prices push above 126 1/8, the futures position should be closed as the breakout strategy failed to materialize.
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