How to Profit From an Explosive Chart Formation


Once you are able to draw the two trendlines, you will know exactly where the two lines would meet. Remember, prices should break out or break down by about two-thirds to about three-quarters of the horizontal width of the triangle.

If the breakout doesn't happen by three-quarters of the horizontal distance through the triangle, then the pattern loses its potency. It's also more likely that the sideways trend continues until something new occurs.


Volume should be heaviest at the base, and should gradually decline as the trading range narrows. A sudden burst of volume should confirm the breakout or breakdown.

Usually, you can find clues in the price volume action leading up to the breakout or breakdown. This can help you determine the likelihood of a continuation, and it can give you the alert that the big move is just about to occur.

Typically, you'll see volume pick up slightly right before the big move. But, compared to the volume activity leading up to it (because volume should "dry up" through the triangle), the volume is noticeably higher.

Estimated Minimum Price Objective

The minimum price objective is the vertical distance of the widest part of the triangle (the base). In the chart above, this distance is indicated by the orange arrows. If the distance was 10 points, then look for a 10-point advance/decline once the trendline is penetrated (in terms of the closing price).

Prices can move much further than that, and usually do when strong volume on the trendline penetration occurs. Always consider past key support or resistance levels to stop the advance or decline -- or, if they are penetrated, for that advance or decline to continue.

Return Test

Once the breakout occurs, the support or resistance levels are found at the stronger trendline. In other words, if the breakout is to the upside, then the upper (descending) trendline was the one that was broken. So, the lower (ascending) trend line acts as support.

You'll find that, quite often, there is a return back to test that trendline. If the breakout is to the downside, then the lower (ascending) trendline was the one that was broken. So, the upper (descending) trendline acts as resistance. Often, there is a return back to test that trendline.

This return test can be an opening to pick up a stock at a great entry point before it's off to the races.