Triangles are everywhere in technical analysis as they represent the favorite way for the market to consolidate. If the Asian session is consolidating most of the time, then most of the time triangles are being formed.
There are multiple interpretations to triangular formations, from simple to complex ones. Ascending or descending triangles are the simplest formations, as they are effectively continuation areas.
It means that price is building energy to break in the same direction as the trend prior to the triangular formation. The time frame plays an important role in this situation.
It may be that, at some point in time, the continuation pattern is forming on the monthly or the weekly chart. In this case, new trends seem to form on the lower time frames every time price is starting a new leg in the triangular formation.
In reality, the market is only consolidating. Having said that, it means triangles are tricky patterns to deal with, and even if they are everywhere, traders still struggle to treat them accordingly.
If that was valid for the simpler triangular formations, it needs to be mentioned here that different trading theories are treating triangles in their own way. The most famous one of them all, the Elliott Waves Theory, has a special relationship with triangular formations.
According to Elliott, there are so many types of triangles possible to form that they needed to be split into more general categories, rather than treated all the same way. From this point of view, Elliott discovered that there are triangles that MUST retest the b-d trend line and triangles that MUST NOT.
As a quick reminder, a triangle is having five segments or legs, and they are all corrective waves. Any corrective wave should be labeled with letters, and therefore a triangle is always labeled a-b-c-d-e.
The nature of the triangle or the way people know that a triangle is/was in place is being given by the two trend lines that define the triangle; the a-c and b-d trend lines. Out of the two, the b-d one is the most important one as it marks the end of the consolidation.
However, it is not enough to look at the end of the triangle, as trading the Forex market with Elliott requires forecasting future price action. The key is to understand where price will go/what price will do after the triangle is broken.
Triangles that MUST retest the b-d trend line are by far more common than the ones that don’t. They are forming at the end of complex corrections, and this tells us the fact that they are acting as reversal patterns.
But even among these triangles, there is a differentiation in the sense that retesting is not mandatory for all of them. In case the triangle is expected to be followed by an impulsive move, a retest of the b-d trend line will not come.
Such a retest will happen only if the move to follow is believed to be a corrective one as well. For example, it may be that the triangle is forming at the end of a complex correction that was the a-wave in a flat.
All Elliott Waves specialists know that the b-wave to follow must be a corrective wave so that the b-d trend line of the triangle that ended the a-wave must be retested. On the other hand, if the triangle is followed by an impulsive move (the triangle might be a complex correction at the end of a triangle of a bigger degree, so a complex correction that ends an e-wave), a retest is not mandatory as price will simply explode higher/lower in the direction of the previous trend of a bigger degree.
As for the triangles that cannot be retested, there are only two possibilities for such a thing to happen; either as a 4th wave or as a b-wave. In other words, if you see a triangle as a simple correction that breaks the b-d trend line but it is not retesting it, it means it should only be a 4th wave in an impulsive move or a b-wave in a corrective one (the only possibility here would be the b-wave of a zigzag).
To sum up, triangles are great for interpreting both the future price action to follow as well as labeling/counting the waves prior to the triangular formation. A simple thing such as a retest of the b-d trend line is telling us much about future prices and this means trades can be taken.
For example, assuming a triangle broke and we know that it must retest the b-d trend line. However, the price is not doing that but keeps pushing in the direction of the break.
Elliott Waves traders that know that a retest is mandatory will fade that move and will use any opportunity to establish trades in the opposite direction.
