Wave Dynamics

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TRIANGLE FORMATIONS

Triangles are one of the classic patterns found in chart analysis and Elliott Wave analysis and depending on the timeframe, can be a common occurrence in forex markets. As such traders should be able to know what to do once such a formation is identified (either at an early or late stage) and how best to trade in order to maximize profits. One of the attractions that make triangles excellent patterns to follow is that the rules associated with trading them are relatively simple.

IDENTIFYING TRIANGLES

1) Definition

From a chartist¡¦s point of view, triangles are horizontal congestion areas that appear as a pause in a trend and for which trendlines can be drawn across the tops and across the bottoms. One or both of these lines would be sloping to make the formation contract (if the lines are horizontal and parallel, then the pattern would be classified as a rectangle), unless the formation is the relatively rare expanding triangle.

Under Elliott Wave theory, the horizontal triangle (not to be confused with diagonal triangles) is a continuation pattern that precedes the final thrust, or impulsive move of the larger degree count, i.e. as wave 4 in a 5-wave impulse, B in an A-B-C move, or X of a double or triple zigzag/combination. Inside the formation, the pattern can be broken down into 5 legs ( labelled as A-B-C-D-E), each leg itself sub-divided into three (hence the triangle is counted as 3-3-3-3-3).

2) Types of Triangles Below are the different types of triangles and the market psychology associated with their distinct shape. Despite their appearance, the triangle¡¦s status as a continuation pattern means that when correctly identified, the breakout should result in a resumption of the trend preceding the formation.

Symmetrical Triangles

This tends to be the most common type of triangle with both trendlines sloping towards each other, and represents a relative balance between buying and selling power inside the formation.

Ascending Triangle

The upper trendline for this formation is horizontal (or close to) while the lower trendline is rising, meaning that buyers are more eager to enter the market on dips. However, resistance is strong with sellers reluctant to let price rise above the upper trendline.

Descending Triangle

A mirror image of the ascending triangle, the upper trendline slopes downwards (meaning sellers are entering the market at lower prices on each bounce) while good support is found near the lower trendline, which is horizontal or close to horizontal.

Expanding (reverse symmetrical) Triangle

As its name implies, instead of the formation contracting, prices make larger moves higher and lower as the pattern develops (trendlines can still be drawn). This type of triangle tends to be quite rare, and represents buyers and sellers running out of steam once the internal resistances and supports (e.g. A-leg trough and B-leg top) are broken.

3) How to find them While novice chartists should be able to find triangles when backtracking through historical charts (example EUR/USD daily chart from 19/07/2004-21/09/2004), it takes practice and a good eye before one can pick them out on intra-day charts. Forming the habit of drawing trendlines for horizontal consolidation patterns is important, not only in identifying triangles but other continuation patterns such as flags.

The key to finding triangles before a breakout has actually occurred is to look for trending moves that are followed by a correction that is sharper than usual (compared to recent price action and volatility). While this simply means that a top has been identified and the A-leg of a correction is unfolding, the next step is to see how the subsequent B-leg retraces A. Obviously, B-leg should falter below A-leg and price should then head lower ¡V even now it is too early to call for a triangle as the entire move could turn out to be a simple A-B-C correction or zigzag (in such case the A-leg bottom would be taken out). How much B retraces A is a factor in estimating the probability that the formation will be a triangle ¡V a retracement of over 61.8% up to 80.9% (or even more) should give a hint that market players are not willing to take price above the recent high and a prolonged period of consolidation (such as that seen in a triangle) is in progress.

While it can be dangerous to jump the gun by labelling a pattern as a triangle too early, further confirmation will be provided once price forms the C-leg trough and D-leg commences, then it becomes pretty clear that the triangle formation is around halfway through completion and would be followed by a breakout after E-leg ends.

Part two will describe the different methods and tactics one can use to trade triangles once they are identified¡K

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