Elliott Wave Patterns – How to Use Triangles and Improve Your Trading
Triangles are probably one of the most occurring patterns in stock charts. Triangles are also one of the important patterns because it provides with a good insight into the overall market trend, market strength and built-in price projection. But it is also one of the patterns that is misunderstood and misused.
What does triangles got to do with the market trend and market strength? Triangles occurs largely towards the final stages of a stock market move or just preceding the final stage. As you know, in Elliott Wave Principle, each market move is segmented into waves and each wave has its own character. Well, the nature of triangles is horizontal or sideways in nature and it is also a slow move. The character of triangles is therefore, consolidation and slowing down the stock move so that the market can catch its breath after moving rapidly in the previous waves, before moving further.
Triangles occurs largely towards the end of a stock market move, either in the final move itself or the move preceding the final move. This means that the stock market trend is going to change soon with the completion of the triangle, or the stock market may make one final move after the triangle before turning around. A break out from a triangle normally results in a swift move.
Here are the list of Triangles as they appear in bull markets. In bear markets, the entry and exit of the triangles is reversed in direction.
The Ascending Triangle - Continuation Pattern
The Contracting Triangle - Continuation Pattern
The Expanding Triangle - Continuation Pattern
The Ending Diagonal – Wedge – Ending Pattern
Note that the Ending Diagonal is not a continuation pattern like the rest of the triangles but an ending pattern.
Dissecting the Triangle
Although triangles appear in many charts, not all patterns that resemble a triangle is a triangle. This is a very important information that every trader must keep in mind. Triangles have rules that must be followed. Otherwise, the likely hood of the forecast going wrong is very high.
Rule 1 – Triangles are made up of five sub waves or legs. It is also possible that triangles have seven or nine sub waves but it is rare.
Rule 2 – Each leg is made up of three wave moves as you can see in each of the diagrams. This pattern is also called 3-3-3-3-3 in Elliott Wave Principle.
Rule 3 – Each of the legs will have a Fibonacci relations with the previous leg. That is, relationship between the legs will be of either 38.2%, 61.8%, 138.2% or 162.8% of the previous leg.
Rule 4 - Leg c overlaps with leg a. Leg d overlaps with leg b.
Guideline 1 – The MACD usually oscillates about the zero line going above and below the zero line with each up and down leg. This is a key indicator that confirms whether or not the unfolding pattern is indeed a triangle.
Guideline 2 - One of the legs will be a complex correction but not necessarily so.
Guideline 3 - One of the leg (either d or e) might be a triangle but again this is not necessary.
Guideline 4 - The final wave (wave e) usually travels further than the trend line and causes a throw over before moving in the opposite direction. This is where a lot of people get trapped. It is also not unusual for the wave e not to travel all the way to the trend line before turning.
Guideline 5 - The volume generally reduces as the triangle progresses – this is typical of consolidation.
Not all the rules need to be fulfilled except for rules 1, 2, 3 and 4 which are must. The more number of rules and guidelines are met, the higher the probability that it is indeed a triangle.
Price Projections of a Triangle
Finally, one of the most important information that a trader can derive from Triangle formation is the price projection. Simply put, the price projection of a triangle is derived by adding the length of the widest part of the triangle to the point of breakout from the triangle. This is depicted in the below diagram.
Do note however that like all patterns, triangles do fail and in case of a failure, the market will move in the opposite direction vigorously. That is the reason why smart traders always practice putting in stop loss in their trading strategy.
Hope this article has enlightened the topic of Triangles. Do share your views and your own experiences trading with Triangles and other patterns.