We’ve covered multiple types of triangles here on ForexGator.com; as triangular formations are quite common. The most popular classification is between contracting and expanding triangles, with the first ones forming more often.
However, even among contracting triangles, there are patterns that form more often than others, even though the main conditions are the same; the a-c and b-d trend lines should contract, pointing towards a common point on the right side of the chart.
According to the Elliott Waves Theory, corrections are either a simple or complex one. Between the two types of corrective waves, the complex ones are more common. Rarely are simple corrective waves being confirmed by future price action.
This brings into question the possibility that the market is forming a stand-alone triangle or a triangle that is part of a complex correction. Between the two, the second option is the most viable one.
Complex corrections are formed out of two or a maximum of three simple ones, connected with one or two x-waves. These x-waves are corrective waves on their own and are intervening ones, in the sense that they intervene between two or three simple corrections.
Having stated earlier that complex corrections are more common than simple ones, shows that understanding how complex corrections are formed is important to any success with trading the forex market. And here is where triangles enter the equation.
Most of the time, a complex correction is ending with a triangle. Either a double or a triple combination, a triangle should be expected at the end of it.
Trading such a triangle is not an easy task, as it depends on various things like the time frame it appears on, etc., but it is extremely rewarding. There are two ways to trade triangles at the end of complex correction; before the b-d trend line is broken and after.
The b-d trend line is the most important one to be broken, as it signals the triangle is completed, so trading should be based on its potential break. The break should be aggressive, as, by the time the triangle is completed, bulls (in a bullish trend) or bears (in a bearish trend) will take control aggressively.
Before the triangle is completed, trading should be governed by the idea that all the legs of the triangle are corrective waves. There are no less than five different legs in a triangle, but this doesn’t mean that there are only five segments!
This is a tricky statement, but trading such a triangle at the end of a complex correction should be made keeping in mind that the e-wave, or the last leg of the triangle, is a triangle in its own, only it is one of a lower degree.
Check the above structure; it has nine segments, but that doesn’t mean it is not a triangle. The only thing is that the e-wave, or the last part of it, is a triangle of a lower degree.
How can we label such a structure? Based on what we discussed so far in this article because this triangle appears at the end of a complex correction, it means that it follows an x-wave. Therefore, to start the count, an x-wave should appear at the beginning of the pattern.
The image above shows how the triangle should be labeled and, as it can be seen, the e-wave is a triangle on its own. Because it is of a lower degree, it should be labeled appropriately.
What I’m trying to say here is that trading the overall complex correction should be made based on the expectation that the e-wave of the triangle is a triangle as well. It means that it makes no sense to look for the break of the b-d trend line until the e-wave forms a visible triangle.
This simple approach is enough to keep you on the right track in the sense that, if the pattern is forming on the bigger time frames, like the daily chart, or weekly, even monthly, waiting for the e-wave to end is a good decision that would spear traders from blocking the margin in a trade that is not moving.
The correct count is represented in the image above, and trading the pattern before the b-d trend line break should consider the time taken for the e-wave to form. How about trading the pattern after the b-d trend line is broken?
This is quite a straightforward thing to do as it is required that the b-d trend line be retested after price breaks the triangles. Based on the retests, the future price action to follow the pattern we discussed is easy to forecast and represent.
Such triangles are powerful instruments that give traders enough information to stay on the right side of the market.