Hello there, this is tradingpedia.com and this video deals with different types of contracting triangles. This is the most common pattern in technical analysis. It is not only one type of a triangle that you may see on a chart but there are other ones, especially when using the Elliott Waves Theory.
But this is not the Elliott Waves Theory, it is only to introduce the notion of a contracting triangle in relation to the price action.
Everyone knows the classic contracting triangle – the market advances, and then forms a contracting triangle. For instance, it goes a-b-c-d-e and then pops up. The contracting triangle, which has five segments, always breaks out of the b-d trendline, while the a-c trendline shows the characteristics of a triangle.
In reality, this rarely happens, because triangles as continuation patterns, when they form, they are either the x-wave of a complex correction in Elliott Waves or the 4th wave in an impulsive move.
This is a contracting triangle that has all the segments smaller than the previous ones – called a symmetrical triangle, or a horizontal contracting triangle. Imagine here – if this is a-b-c-d-e – this is a horizontal or symmetrical contracting triangle and in this arrangement the a-wave is bigger than the b-wave, which is longer than the c-wave, and so on. Therefore, whenever the segments of a triangle are smaller than the previous ones, you have a horizontal contracting triangle.
Such a pattern in the currency market is not that common. What it is common is that you will have the b-wave longer or bigger than wave a, for instance. That is an irregularity and in that case the b-wave looks like this, but the triangle still contracts. If you imagine a b-d trendline here, the pattern it still a triangle that shows continuation.
In this arrangement it is often forming a pattern called pennant – the market builds energy to pop higher and the market builds energy that it contracts into the apex of the triangle before pushing higher. Another arrangement is that you may have a bearish trend and you will have the a-wave like this, a longer b-wave, a c-wave shorter than the b-wave, a d-wave even longer than the c-wave, and then with the c-wave. And then breaks lower.
What is this? This is a triangle. Judging by its definition, if we connect the a-c trendline and the b-d one we see that they contract. This is called a running triangle – we will have a special video for this pattern – and these triangles are common in the currency market.
The uglier the pattern, the more powerful it is. Rarely you will see a perfect ascending or descending triangles in the currency market.
Let’s look at some examples because triangles are everywhere. Let’s go back on the left side of the chart and in November 2016 the EURUSD moved lower and it formed a triangle – a-b-c-d-e. This is a triangle that acted as a reversal pattern. Very often you will have triangles at the end of complex corrections or at the end of strong trends when the market reverses from a triangle. It is usual that the market pierces the a-c trendline before breaking the b-d one.
Also, usually the b-d trendline is retested. The market advanced and then at 1.25, in 2018 what did it do? It formed a triangle – a-b-c-d-e. All we have to do is to connect the points and find the trendlines to see the triangle.
It shows the market pushing at the highs and failing, forming lower highs before breaking lower. Even here, the market forms a triangle as a reversal pattern.
Even here, at the current price, the EURUSD forms three higher highs and the price action looks like a triangle. Not all triangles are contracting – some of them are expanding and different types exist too.
At this point in time consider that triangles are everywhere, they do not act only as continuation patterns (as a matter of fact, most of the times in the currency market they act as a reversal pattern) and the uglier the pattern is, the more powerful it is. Bye, bye.