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So, the first observation is that the Elliott Wave theory of corrective triangles is that they were originally based on a stock market. As Elliott believed himself, the market moves were based on deep human psychological impulses and that these impulses caused repetitive cycles on it.
According to the Elliott Wave triangle rules, the upward or downward price swings usually occurred in five-wave patterns, which then were followed by the corrective triangle patterns. The five-wave pattern was dubbed by Elliott as an impulsive wave, whereas the three-wave patterns were called corrective patterns. So, if the impulsive wave moved in the upward direction in a total of five opposite swings, the corrective pattern would move in the downward direction also in three opposite swings.
Now, this level of simplicity is actually an illusion as Elliott himself has put forward a number of different cycles that interchange between one another. He called the interaction between impulsive and corrective waves a cycle, and in order to extract a plausible technical analysis out of these formations, one has to look at a substantial number of cycles on a chart.
One of the key characteristics of the foreign exchange market is that it tends to get quite volatile on many occasions. However, there are also times when Forex prices consolidate and follow a defined trend in a certain direction. In the Elliot Wave triangle theory, this consolidation happens through the interchangeability of impulsive and corrective patterns.
Every time the price starts to increase or decrease through the impulsive five-wave pattern, the three-wave corrective triangle will kick in and pull the price back, making the whole movement more stable in the long run. The main way markets consolidate is through triangles.
Within the theory of the Elliot Wave, triangle patterns have three waves. However, the entire structure consists of five separate legs, which are labeled with alphabetical letters: a, b, c, d, and e. Another crucial step in identifying a corrective triangle pattern is to have two separate trendlines drawn in the chart. These trendlines must connect the ends of a-, c-, and e-waves, as well as the ends of b- and d-waves.
The two types of triangle patterns are differentiated by the direction of these two trendlines. So, to repeat it once again, there are two main types of corrective triangles within the Elliot Wave theory:. In fact, an average chart with any given timeframe will probably show at least one contracting triangle. As noted earlier, the contracting triangle pops up when the two trendlines connecting a-c-e and b-d points come closer together.
What this means is that the asset price becomes less and less volatile over time and it continuously posts lower highs and higher lows. This specific pattern usually forms before the major economic releases or other important anticipated events, when the suspense is really high and everyone is waiting for a major announcement. As that announcement is made, the low volatility levels are instantly changed and the contracting triangle breaks higher or lower of the pre-determined trendline.
This basically happens after almost every stabilization period: the asset volatility is constantly decreasing to the point where the price breaks with a major increase or decrease. As pointed out earlier in the description, expanding triangles form less frequently than contracting triangles, and that has something to do with the vicious nature of this pattern. However, it is worth mentioning that it forms way often on the foreign exchange market than on other markets.
So, what is an expanding triangle pattern? As the Elliott Wave theory explains, there will be certain times when the price fluctuations in the corrective patterns are exceptionally intense. Moreover, each individual leg is larger than the previous one, forming an expanding structure within the chart. Now, when an expanding triangle occurs, it sends out contradictory signals to traders, which leads them to make faulty decisions and be ejected from the trade. The first immediate response you would have is to rush and open a position in the direction of a b-wave, while placing the stop-loss at the beginning of it.
In a very short time, the new d-wave starts to kick in with the opposite direction. This is basically the usual outcome when the expanding triangle chart pattern occurs. This will usually withhold them from opening a new trade, failing to recognize the expanding wave pattern in the first place, and being blinded by this illusion that the e-wave will never end.
And while this is certainly a myth and the price will definitely break from the e-wave, the vicious fluctuations before will prevent people from seeing that. Even the expanding triangles have their own sub-types that differ from one another in terms of their specific formations. Out of all existing expanding triangle patterns, the horizontal expanding triangle is the rarest form that can form in the chart.
The horizontal expanding triangle has every next wave larger than the previous one, just like we said when explaining the basics of expanding triangles. And, it goes without saying that such fluctuations are the most damaging of all. As the name of this triangle pattern suggests, the formation of an irregular expanding triangle will include some sort of unexpected patterns.
And fairly enough, there is an irregularity here: instead of every single wave being larger than the previous one, the b-wave will be significantly smaller than all other waves, including the initial a-wave. Plus, the fact that the b-wave is smaller makes it easier to see the expansion of the two trendlines more clearly — the degree of the b-d trendline is more acute. When the wedge appears after an extended price move, we expect a reversal of the trend, when the wedge appears earlier in the trend, we expect it to be a temporary retracement that will continue the main trend in place.
Typically the more powerful wedge formation is the potential trend reversal formation which occurs after a prolonged trend move. The symmetrical triangle is a situation on the chart where the tops of the price action are lower and the bottoms are higher. Also, the two sides of the triangle are inclined with the same angle. This creates the symmetrical character of the triangle. Typically with a symmetrical triangle pattern, the expected directional breakout is unknown.
The reason for this is that the bullish and the bearish move have equal strength as seen thru the price action. When a breakout eventually occurs, it is likely to provoke a price move equal to the size of the pattern. Therefore, you should carefully identify a potential breakout in the upper and the lower level of the symmetrical triangle in order to take the right position in the market. The sketch below illustrates the symmetrical triangle formation and possible breakout scenarios :.
As you see from the example above, the potential target is based on the size of the triangle formation. With this type of measured move analysis, you will know what to expect from the symmetrical triangle breakout, whether it breaks upwards, or downwards. Pennants on the chart have a similar shape to that of symmetrical triangles.
They typically appear during trends and have a trend continuation character. The bullish pennant is similar to a symmetrical triangle in appearance, but the Bullish pennant formation comes after a price increase. Since pennants have trend continuation character, the bullish pennant is likely to continue the bullish trend on the chart. When the upper side of the pennant gets broken upwards, we are likely to see an increase equal to at least the size of the pennant, and typically larger.
And so when trading pennants, a second target should also be used to catch a larger move. When calculating the second target, you would analyze the price leg immediately following the pennant. You could set the target to of the previous leg or. When the trend seems strong and has a steep slope a measured move would be an appropriate second target, and in all other cases the. See that here we have two targets. The red target is the first one, which is as big as the size of the pennant.
The green target corresponds to the size of the previous up move, which should be applied starting from the upper side of the pennant. As you have probably guessed, the bearish pennant is the mirror image of the bullish pennant. Bearish pennants start with a price decrease and end up with a symmetrical triangle appearance.
Since pennants have trend continuing character, bearish pennants are likely to continue the bearish trend. When the price goes through the lower level of the bearish pennant, you should first look to capture the first target, which is equal to the size of the pennant itself. When the price completes this target, you can then try to catch the expected further decrease, which is equal to the size of the previous leg or.
Refer to the image below for a Bearish Pennant:. You can hardly mistake an expanding triangle on the chart. The reason for this is that it has very unique parameters. Both sides of the expanding triangle are inclined, but in opposite directions. The direction of the potential price move of this chart pattern is very tricky to determine. Therefore, we will now introduce a few rules, which will help you to identify the direction of the expected price move.
If the expanding triangle is a horizontal mirror image of a symmetrical triangle, then you should trade the formation as a trend continuation pattern. The image below shows a sketch of an expanding triangle with symmetrical lines:. If the two sides of the expanding triangle are increasing, then the pattern is likely to have bearish character. If the two sides of the expanding triangle formation are decreasing, then the figure is likely to have bullish potential.
If the tops of the price action are increasing, but the bottoms are decreasing with higher intensity, then the pattern has bearish character. On the contrary, if the bottoms are decreasing, but the tops are increasing with higher intensity, then the pattern is likely to have bullish character. In other words, you should trade in the direction of the side, which has higher inclination.
Now that we have discussed most of the important triangle patterns in Forex, I will now show you how a triangle trading system could work. The chart illustrates five triangle examples and their potential outcome. The chart starts with a big symmetrical triangle.
The price creates three decreasing tops and three increasing bottoms on the chart. The red arrow in the beginning of the triangle measures its size. As you see, the same red arrow is applied when the price breaks the upper level of the triangle. The red arrow indicates the potential target of the pattern, which gets completed after a week.
Meanwhile, on the way up the price action creates a rising wedge chart pattern. As we discussed, the rising wedge has bearish potential. With the the breakout through the lower level of the wedge we notice a minor correction.
At the end of the bullish tendency the price creates another symmetrical triangle. Later on the price breaks through the lower level and completes the size of the pattern pink arrows. While decreasing, the price action actually creates a bearish pennant.
This is the consolidation after the first impulse of the bearish trend. The price breaks the lower level of the pennant afterwards. On the way down we see the price completing the first target, which equals the size of the pennant red arrows. Then the decrease continues and the decrease is extended to a size equal to the previous leg. On the way up the price action creates an expanding triangle pattern.
Notice that both the upper and the lower level of the pattern are increasing. In this case, the expected price move is bearish and should be equal to the size of the pattern.
A triangle chart pattern involves price moving into a tighter and tighter range as time goes by and provides a visual display of a battle between bulls and. A forex triangle pattern is a consolidation pattern that occurs mid-trend and usually signals a continuation of the existing trend. The triangle. Triangles can be best described as horizontal trading patterns. At the start of its formation, the triangle is at its widest point. As the market continues.