The most popular pattern in technical analysis is a triangle. If the market is going to consolidate, chances are it is going to form a triangle.
Multiple types of triangles are possible to appear on any chart. As a corrective wave, Elliott found that all the lower degree segments of a triangle must be corrective as well.
We covered here the concept of a triangle under the Elliott Waves Theory already in a few articles. It should be known already that a triangle has five legs or segments, and all of them are corrective.
The leg of a triangle can be a simple correction (flat or zigzag) or a complex one. Between the two possibilities, almost always a complex correction is forming.
A triangle can end with a triangle as well. While this sounds confusing, one should know that the e-wave is the only leg of the triangle of a bigger degree that can be a triangle on its own.
It is not possible, for example, for the a-wave to be a simple triangle of a lower degree. It is very likely, though, for it to be a complex correction that will end with a triangle of a lower degree.
All these statements seem to be of little or no significance to the novice Elliott Waves trader. In fact, like in anything related to trading, the devil is in the details.
These details are part of what makes a trader being right or wrong. Hence, a greater attention to details is required if one is to succeed making a profit in this business.
Triangles to be Seen in Forex Trading
Elliott defined triangles as being either contracting or expanding. A contracting triangle is having the two trend lines, the a-c, and b-d pointing to a common point in time.
On the other hand, an expanding triangle will have the two trend lines moving apart from each other if you look on the right side of a chart. The classical image of the two triangles, in theory, looks like below.
The first triangle is contracting, as the two trend lines are meeting on the right side, and the second one is expanding, as they are moving away from each other. The problem with the triangles above is that the Forex market is forming triangles of different shapes.
While they are still contracting or expanding, they rarely look like the ones depicted in textbooks. Therefore, traders must adapt to the new reality.
One reason why triangles are different these days is because FX trading is different. A few decades ago it was all human trading in the stock market, now it is almost all computer-based.
Trading algorithms are buying and selling thousands of positions per second (!) and this causes sudden spikes or dips to appear. Hence, the classical triangle interpretation is not valid anymore.
A situation like the one below is not uncommon on the Forex market. In fact, it is happening most of the time; a triangle is followed by another one.
It very well may be that the two triangles are of the same degree, or of different degrees (degree = cycle; please check the previous article here on Forexgator.com). The cruel reality is that there are no less than ten consecutive corrective waves; five belonging to the first triangle, and five to the second one.
While Forex traders are looking for the third wave in an impulsive move, the situation above clearly shows that impulsive moves are not that common and, if anything, they are part of a bigger degree corrective wave. Keep in mind; triangles are everywhere in today’s Forex market!
The two possibilities and the correct counts are shown in the two images below. The first one is showing the two triangles being of the same degree.
In this case, they should be connected by an intervening wave of a bigger degree, the x-wave. The bigger degree cycle is shown with a different color.
The second triangle is not yet broken, so the focus here should be on the b-d trend line. A retest might be in the cards, so traders should focus on buying the dips on the little time frames.
Below there is another possibility, and, by the time the second b-d trend line is broken, it means the whole correction, the one labeled in blue, is completed, and a new wave starts. The implications are similar for the two triangles, only the labeling is different.
At a closer look, the two contracting triangles are totally different from the images depicted in trading books. This is because the FX market has changed and will change in the future too.
In the next article, we’ll move even deeper into advanced Elliott Waves strategies adapted to today’s trading environment.