Forex markets spend most of the time in consolidation. To put this in perspective, imagine that more than 70% of the time the market is open, the price is in a range.
Moreover, not all currency pairs are traveling the same. Volatility is different if you compare majors with crosses.
It is different even if you compare the major currency pairs. EURUSD volatility is not the same as in the USDCAD pair, for example.
Not to mention the crosses. There are “dead” crosses, like NZDCAD and “active” ones, like GBPJPY or EURAUD.
Combining all the moves of all these Forex pairs, and 70% of the time they are ranging. They do have something in common, though: the favorite way for the market to consolidate is to form a triangle.
The problem with triangular formations is that few people know they exist, and even fewer know how to interpret them. Elliott’s way of interpreting triangular patterns is the most complex and complete.
Technical analysis deals with interpreting the past to forecast the future. Traders use pattern recognition for projecting future prices.
A classical approach to triangles exists since the beginning of the technical analysis. Everyone knows what an ascending or descending triangle is looks like.
What traders do not know is what to do after a triangle is forming. Where it is forming and what is the next move that follows.
Classical technical analysis tells us only how to trade a triangle. How about how to trade the move that follows a triangle?
Triangles as Simple Corrections
Triangles have five legs, or swings, or waves. All of them are corrective in nature, either simple or complex.
Elliott discovered that markets are moving in five sequences or waves, and then the move is corrected with three other waves. The five wave part of the first move forms a so-called impulsive move.
In any impulsive move, the 2nd and the 4th waves are corrective in nature. As a rule of thumb, it is NOT possible to have a triangle as a second wave.
This is a powerful limitation that Elliott puts when counting waves. Many people are labeling a triangle as a second wave, but this is a wrong approach to counting waves.
Coming back to pattern recognition, if a triangle is spotted anywhere on a chart, we know from the start it is not possible to be the 2nd wave in an impulsive move. This option should simply be scrapped.
How about the 4th wave? Is it possible to have a triangle as the 4th wave of an impulsive move?
The right answer is yes, it is, but…this possibility is so rare that it could be easily ignored. When a triangle forms as a 4th wave, the price action to follow is limited both in time and in distance.
To continue the logical process, if a triangle is spotted anywhere on a chart, it cannot be the 2nd wave in an impulsive move and, chances are, that it is not a 4th wave either. Having said this, only corrective waves are remaining for the correct interpretation of triangular formations.
Triangles as Complex Corrections
This leaves us with the possibility to look for triangles as part of complex corrections. On the other hand, another Elliott rule is telling us that a complex correction is NEVER starting with a triangle.
Just like that, another limitation for the possible place a triangle can form. There are only two more options left; a triangle that forms in the middle or at the end of a complex correction.
A triangle in the middle of a complex correction is called an x-wave. These are nasty triangles, as the price is simply consuming time before the previous trend resumes.
Uncertainty is the name of the game in a triangular formation. This is the reason why they are ugly patterns, as algos don’t know what to do until the trend resumes.
It is very common to find a triangle as a continuing wave or intervening one. These x-waves are all over the place.
If a triangle is never starting a complex correction, it is almost always ending it. When this is happening, the triangle acts as a reversal pattern.
Everyone is looking at classical double or triple tops or bottom patterns. They are part of triangular formations.
Moreover, everyone knows a head and shoulder pattern. In fact, a head and shoulder is nothing but a triangle that acts as a reversal pattern.
If you put together all the information listed so far in this article, you’ll have the answer to what the move that follows a triangle is. The most frequent situation, or almost always, triangles appear as x-waves at the end of complex corrections.
This means that the entire pattern is a corrective one. Hence, it should be retraced minimum 50% (if the bigger degree pattern is a triangle) or 61.8% (if the bigger degree pattern is a flat).
It is enough for profitable trading. If triangles appear so often on the Forex market, they are telling us what the next move will be.