Triangles and Wedges, Trading the Squeeze

[Fairman]

Triangles and Wedges, Trading the Squeeze

When price makes lower highs and higher lows, it squeezes into a narrowing range, forming a triangle. Wedges slope in one direction, with converging trendlines. Both show compression, which often ends in expansion.

diagram.png (36.9 KiB) Viewed 47 times

Types of triangles:

- Symmetrical: lower highs and higher lows, no clear bias.
- Ascending: flat resistance and rising lows, often leaning bullish.
- Descending: flat support and falling highs, often leaning bearish.

Wedges:

- Rising wedge: both lines slope upward, but converge. Often leans bearish.
- Falling wedge: both lines slope downward, converging. Often leans bullish.

How to trade them:

1. Draw trendlines touching at least two highs and two lows.
2. Wait for a decisive close beyond a trendline, ideally with strong momentum.
3. Check the higher-timeframe bias for confirmation.
4. Look for a retest of the broken line.
5. Place the stop on the other side of the retest, or inside the pattern.
6. Target the height of the widest part of the pattern, projected from the breakout.

Cautions:

- False breakouts are common, and liquidity sweeps often occur beyond the line first
- Trendlines can be drawn differently, so stay consistent
- Low volatility periods can break without follow-through

Compression means energy is building, but not which way it will release.

Wait for the break, then respect the stop.

[LondonNewsTrader]

On the measured target in point 6, I've found it works noticeably better when the breakout comes in a normal session than when a data release causes it. A triangle that has been compressing for two days ahead of a central bank decision will usually break on the decision itself, and the first push often travels well past the projected target in a few minutes, then gives half of it back. Using the pattern height as the target in that situation means you either get filled on a spike or miss the exit entirely.

So I ask why the range is narrowing before trusting the pattern. If the market is simply waiting for a scheduled number, the triangle is a symptom of the wait, and its apex tells you roughly when the release is due rather than which way price will go.

Your caution about low-volatility breaks without follow-through is spot on for the Asian session too.

[FXS Prop Desk]

Compression patterns are useful, and the breakout side is where most mistakes happen. Waiting for a candle close outside the pattern, and ideally a retest of the broken line, reduces false breakouts, which are especially common in tight triangles near the apex.

On stops: placing them beyond the opposite side of the pattern is often too wide to give a good risk/reward. A stop beyond the retest swing is usually more practical. And a breakout very close to the apex tends to be weaker than one that happens around two-thirds of the way through the pattern.

[Shadow Trader]

I measure where the break happens as a fraction of the distance to the apex, because it changes how I set the target. Breaks between roughly 50 and 75 percent of the way along get the full height of the pattern, and anything later gets half.

The two thirds point from FXS Prop Desk fits this, and the reason is mechanical. Near the apex the pattern is only a few pips tall, so an ordinary candle is past the line before anyone can call it a break, and there is little range left behind it.

On wedges, I would be careful with the bearish label on a rising wedge inside a strong uptrend. On EURUSD H1 plenty of them break upward and simply turn into a steeper channel, so I give the higher timeframe the deciding vote rather than the shape.

Touch count is my other filter. I want at least five touches in total, three on one line and two on the other, because two plus two can be drawn through almost any noise.

Do people measure the height using wicks or candle bodies? Wicks give a bigger target that I find gets hit less often, so I use bodies for the target and wicks for the stop.