How To Identify Breakout Formations

Up until now we have talked about psychology, trend lines, and zones. We never talked about the type of formations that could occur before a breakout happens. When you look at your charts after you read this blog. I want you to be able to see all the different formations that are happening. Lets get started!!!

Symmetrical Triangle

This triangle formation is called a symmetrical triangle. The highs are gradually becoming lower highs and the lows are becoming higher until a triangle is formed and a breakout occurs.  When dealing with a symmetrical triangle you might not know which direction the breakout will be. Know you can use the other skills in your Forex tool box to get a few confirmations.

Is it by a major support or resistance level? Lets check!

As I scroll out and check what has been going on for the past month I notice that a major resistance level has been tested 3 times. I can also see that the triangle formation has formed really close to the resistance zone and I can predict that when the breakout happens it will be bearish.

But the resistance zone might not be enough. Lets keep going.

The triangle is getting smaller, and I start checking my charts more often because I really want to catch this breakout. I start drawing trend lines looking for a breakout. In order to draw a proper trend line you need to connect 2 wicks. Due to the poor quality of the picture it might not look like I've connected 2 wicks, but rest assured that they are connected. The trend line hit a bearish candle and now I wait for a retest. Two hours later both candles have retested and rejected off of that trend line, and now I can make a sell entry. This was not a major breakout but 30-50 pips is always good by me.

Ascending Triangle

An ascending triangle is a triangle where the top of it is flat or flat-ish, because the market won't usually give you a perfect formation, and the bottom starts becoming tighter until a breakout occurs. Generally this breakout formation is bullish.

Always make it a habit to check for as many confirmations as possible. Draw a trend line and check for a breakout and retest. Then buy!

Descending Triangle

Exact opposite of an ascending triangle. The descending triangle formation has a flat bottom and pointy top. Descending triangles are generally bearish.

Pennants & Flags

Pennants & Flags are my personal favorite types of breakout formations. They are very easy to spot which allows you to get prepared for a breakout. One issue is figuring out the direction of the break out. Sometimes it is difficult to determine that, so you have to incorporate different analysis skills, like the use of Fibonacci retracement, trend lines, support and resistance lines, and Elliot wave theory. If you can properly use some of these techniques or even all of them, and they all confirm a specific direction, then the breakout will probably be in that direction. Below I will provide examples of pennants and flags.

Pennants look like little triangles that are getting tighter and tighter until the breakout occurs. When trading pennants it is advised to make a buy or sell stop in the direction you think it will move above or below the longest wick, which is usually the left side since it forms a tiny triangle. It is recommend to put a stop loss above or below the opposite wick that you chose to take a direction in. 

Flags look like little rectangles or squares that can be traded the same exact way you trade the pennants, by putting your stops above and below the longest wicks.

From my personal experience trading USD/JPY these formations take around 7-11 hours to complete and the breakout usually happens during the US session. 

After reading this I suggest opening up your charts and going about finding these formations so you can get used to spotting them. Thank you for reading.

Yours truly,

ManBearBull