The vast majority of traders out there thinks that triangles can only be contracting and expanding, and they are right. However, contracting triangles are not like the ones one see in trading books, especially when trading the currency markets, where volatility is high and quick moves erase levels just like that.
Types of Contracting Triangles
Contracting triangles, for example, can be irregular, horizontal, and running variations, and the same is valid of the expanding ones as well. Even though the names are not saying pretty much, it is important to note that each and every type of the above-mentioned triangles are pretty common when analyzing markets from a technical analysis point of view.
Videos that come with this educational series are showing you the basics of the triangles listed above, and the second part will deal with special types of triangles. The thing is that all the triangles listed above are on the b-d trend line, in the sense that the b-d trend line is the most important one and that is the one that should be looked at for respecting the rules of a triangle.
C-E and A-E Trendline Formed Triangles
However, there are triangles that also form on the c-e trend line and even on the a-e trend line, and even special variations. The only condition that should be respected on all these cases is for the triangle to contract, and this means the a-c and b-d trend lines to have a point in time in the future when they should meet.
Triangles are of two types, contracting and expanding, and the most common type of a triangle is the contracting triangle. However, this does not mean that the expanding triangle is not appearing, only that it is rare.
In a contracting triangle, like the name suggests, the a-c and b-d trend lines are contracting and this is where the name is coming from. In order for the two trend lines to contract, it means that waves are shorter and shorter starting with wave a and finishing with the last one, the e wave.
But this is not mandatory. Sometimes, for example in an irregular formation as it is being called, wave b is the longest leg of the triangle and it is bigger than wave a. Is the way the triangle is being broken and interpreted changed? Well, no, and I will explain below why.
The reason is that the main rules of the triangle, namely the break of the b-d trend line and the form of the a-c trend line are still the same so nothing is changed there but this is a special type of triangle, an irregular one. This kind of triangles usually have bigger thrust or measured move and it is important when looking at the take profit for your FX position or to set the expiration date of an option.
Completing the Triangle
By the time the b-d trend line is broken it is considered that the triangle is completed and we can move on with the next move market is forming. This is valid regardless of the type of the triangle, if it is contracting or expanding, or it is a special one or not.
Other triangles are not even having the a-c trend line, but they are forming with a-e trend line or even with c-e one. However, these are only variations on the same theme as a triangle that has the a-c trend line broken by the e wave it means that most of the times wave e is longer than the c wave and this gives the potential a-e trend line.
In the case of expanding triangles, things are a bit tricky as in order for a triangle to expand, the a-c and b-d trend lines should not meet anywhere in the future. This gives the triangle the expanding nature.
In its very classical way, the expanding triangle has all legs that follow wave a bigger than the previous one and the rules for the a-c and b-d trend lines should be the same. It is worth mentioning that if you are seeing an expanding triangle in its classical/horizontal shape, most likely market is not forming one and it is probably a complex correction.
Expanding triangles that are really common are the ones that are forming a series of three different highs or lows and taking any chart and looking at past prices and you’re going to see that these kind of formations are quite common actually.
For the binary options trader, triangles are tricky but a clear understanding of how they are forming, where they appear and how to trade them is vital. The two video analysis that are coming with this article are making the transition from the previous article with the thrust of the triangle and puts into perspective both binary options trading as well as FX trading with these patterns.