Now, I'm going to walk you through how you can go about setting your stop loss, entries, and exits.
There are a few ways to do it…
You can either look to go long on the break of the highs, or you can look to get long when the market breaks and close above the resistance level.
There's really no right or wrong to this.
Here’s what I mean:
As for stop loss...
I typically recommend looking at the nearest structure low and give it some buffer below it.
You can use an indicator like the Average True Rage and set it 1 ATR below it.
Why do you want to give some buffer?
It's because you don't want a market to come down, spike you up, and then continue trading higher.
So, give it some buffer, and give your stops more room to breathe.
But when the market breaks and closes below the nearest structure low, chances are this pattern is invalidated, and you don't want to stay in this trade any longer.
This is how you can go about with your entries and your stop loss.
Again, there are two ways you can go about it.
For taking profits, the first thing that you can do if you want to have a fixed target is that you can actually measure the move from the swing high to the low.
Here’s an example:
An alternative approach that you can do if you want to trail your stops, is by using a moving average.
For example, you can use a 20-period moving average.
You can trail your trade as the market trades higher and you only exit if it closes below it.
Here’s an example:
Whether you only use 20, or 50-period moving average, there's no right or wrong.
20 MA would keep you in with the short-term trend.
The 50 MA would keep you in with the medium-term trend.
It really depends on how long or how short of a trend that you want to ride.
Here's another example:
Can you spot the ascending triangle pattern?
You can see higher lows coming into this resistance and you can see that this is pretty much a losing trade.
It basically got you into the trade, you long the breakout, and collapses under which you got stopped out.
Nothing that I share on my YouTube, my blog, website, or anything, is 100%.
It's all dealing with probabilities.
So, always manage your expectations that there will be winners and there will be losers.
And finally, another example I want to share is the opposite:
It is descending triangle in a downtrend.
You can see lower highs coming into support.
So again, how could you have traded this pattern?
You can look to place a sell stop order just below the lows or wait for the market to break in close below this support before you get short.
For the stop loss, you want to reference from the nearest swing high.
Because if the market can break in close above this downward trend line, chances are this pattern is invalidated and you don't want to stay in the trade any longer.
Where do you set your target?
Again, I mentioned that there are two ways:
1. Take the distance from the high to the low. So, if the distance from the high to the low is 500 pips, your projected target is 500 pips.
2. Trail your stop loss. Use a moving average, like the 20 or the 50 depending on the type of trend that you want to capture.
If you let your winners run, there will be small winners and small losses.
But there will be a few times, possibly one in ten trades where you catch a big move and the market just keeps on trending over a long period of time.
Let’s do a quick recap…