EURNZD Getting Squeezed + A Better Way to Trade Triangle Patterns

Cory Mitchell, CMT

*In reference to the Renko charts discussed in the video: use a 1-minute timeframe for setting up and tracking Renko!

The EURNZD was one of the most volatile pairs the first three weeks of March.

Like many other pairs, the last week has been choppier. We are seeing a lot of consolidation and false breakouts in many pairs.

Eventually, something is going to give. While we may not get the same level of volatility that was seen through the first three weeks of March, this pair still has a lot of reshuffling to do (and other pairs as well).

The EURNZD is in a triangle pattern since just after the March 19 swing low. 

The triangle is ragged, especially along support. The triangle support area is between 1.8330 and 1.8250.

The last three major swing highs are connected by a descending trendline, with that trendline currently intersecting just below 1.85.

Ways to Trade EURNZD

Textbooks would say to buy when the price rallies out of the triangle to the upside, or short when the price breaks below triangle support. A stop loss goes just outside the opposite side of the pattern from the breakout. The trade's target is the height of the pattern (left side) added to the upside breakout point or subtracted from the downside breakout point.

There is a better way.

A Better Way to Trade Triangle Patterns

I like to watch for consolidations that occur near support or resistance. On the hourly chart, a consolidation is a 3 or 4 price bars that move mostly sideways.

I then watch for breakouts of those smaller consolidations which are near the edges of the triangle.

For example, if the price consolidates at support, no matter which way the price goes we have a trade. An upside breakout indicates the triangle is continuing. A downside breakout signals the price is breaking out of the triangle. These small consolidations provide cleaner entry points than trying to figure what the exact entry point is on a ragged triangle pattern like this.

The stop loss distance is also smaller (compared to the textbook method) since a stop loss can be placed on the opposite side of the consolidation from the breakout. The consolidation is small, which means the stop loss is too. This helps create higher reward:risk to trades.

If the price moves up to the top of the triangle and then consolidates, we can trade an upside or downside breakout of the consolidation. Once again, this tells us if the triangle is likely to continue (downside breakout) or if the price is potentially breaking out of the triangle (upside consolidation breakout).

The following chart shows several such consolidations. Not every one would have produced a winning trade. No strategy does. But typically we got at least enough movement in our favor to either produce a decent profit, a small profit, or only a small loss. 

As this triangle continues to compress, a bigger move is likely to come. Using this method, with a small stop loss, coupled with a trailing stop loss may produce a huge reward:risk trade when that big move comes. For a trailing stop loss, I like to use Renko charts, set up and tracked on a 1-minute timeframe.

Final Word on EURNZD

We'll see what happens here. Volatility tends to follow a lull, especially if the lull was preceded by a lot of volatility (which it was). Other than knowing that, we don't need to predict much.

If the price consolidates near triangle support or resistance, this sets up a trading opportunity with a small stop loss. Using a trailing stop loss, if we get that big move, there could be a nice reward:risk to trade here.

There is also the possibility the price continues to move sideways for some time.

By Cory Mitchell, CMT. Join me in my free Facebook swing trading group.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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