Triangle Breakout

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.

ADAPTED OPTION STRATEGY: BEAR PUT SPREAD

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.

LONG SYNTHETIC FUTURES: Leg 1

Trading Symbol OZN H7
Option Type PUT
Option Strategy BUY
Strike 125
Expiration Mar 2017

LONG SYNTHETIC FUTURES: Leg 2

Trading Symbol OZN H7
Option Type PUT
Option Strategy SELL
Strike 124
Expiration Mar 2017

ADAPTIVE FUTURES STRATEGY

Trading Symbol ZN H7
Strategy SHORT
Entry Point 125  5/16
Target 123 19/32
Stop Loss 126 1/8
Contract Expiry Mar 2017

TRIANGLE BREAKOUT: ZN H7 NOVEMBER 17TH

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

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).

POTENTIAL DOWNSIDE PER CONTRACT

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.

Triangle breakouts happening now in the markets

Euro FX: 6E

Swiss Franc: 6S


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