Triangles are a popular chart pattern because they are relatively easy to spot and offer well defined entry points, stops and profit targets. The profit target is usually two or three times more than the risk (but not always), thus providing an attractive reward-to-risk ratio. Over the last several months, these four stocks have seen price action that has been continually compressed. Like a spring, the price eventually breaks out of the tightening pattern providing a trading opportunity.
Royal Caribbean Cruises Ltd. (RCL) has been moving within a triangle pattern since the start of June. Each high point since June has been at a slightly different price, so using $57.50 as the breakout point eliminates some of the probability for a false breakout. If the breakout occurs, the upside target is $61.30 with a stop near $54 (below triangle). There is also a wedge pattern in play since April. Wedges are often reversal patterns, so a drop below $54 would break both the triangle and wedge pattern to the downside. Stops could be placed just above $57 with a target $50. The risk-to-reward is favorable for the trade, but not ideal. To lower the risk of the trade, a more conservative approach would be using a tighter stop: placing a stop about half way inside the pattern. This usually gives the trade more than enough room while reducing the risk of the price moving against you.
Wyndham Worldwide Corporation (WYN) was in a choppy triangle pattern since the beginning of 2014, and in July it broke to the upside. The price is still relatively close to the breakout point of $75. The target for the breakout is $88 to $90, and a stop can be placed below $73. A drop back below $72 - which is less likely at this point - would mean the upside breakout was false. Unable to go higher, the downside target would be $64. A stop could be placed above $75 on the short trade should that scenario develop.
Sears Holdings Corporation (SHLD) has been in a triangle pattern since it gapped down strongly in April. This stock is considerably volatile, seeing 50% moves in a matter of months, and sometimes weeks. A rally above $42.60 can be used as an upside breakout entry level. A stop goes below $38 and a target at $55. A drop below $37.60 breaks the pattern to the down side; place a stop above $42 and a target at $25.50.
First Niagara Financial Group Inc. (FNFG) is consolidating after a large drop in January. This is not a perfect triangle pattern - the highs and lows don't all line up with the trend lines - but the consolidating and tightening pattern can still be seen. This means some estimating must be done in order to determine an optimal entry point. A move above $9 provides enough evidence that a break is occurring. The target is $10.35 and a stop can be placed near $8.50. On the other hand, a drop below $8.50 would take out the June low and potentially signal a continuation of the overall downtrend. Downside target is $7.10 with a stop above $8.90.
The Bottom Line
Triangles typically provide a good reward to risk ratio, as well as defined entry points, stops and targets. To attain the estimated target, measure the height of the triangle at the widest point, and then add or subtract that from the breakout point (upside or downside breakout respectively). If the reward to risk isn't as favorable as desired, the stop can be reduced and placed near the center of the pattern instead of on the opposite side. Triangles won't always be perfect - often the prior highs or lows won't line up exactly with the trendlines. That is ok, as long as we can see the price is consolidating, helping us determine an optimal entry point. Keep in mind all strategies carry risk of loss. Only risk a small percentage of account capital on any single trade.