One of the things to consider when trading a contracting triangle is the importance of its apex. However, before looking at that, one needs to know what an apex is.
Finding the Apex
Well, it should be mentioned that the apex refers only to contracting triangles and it represents the meeting point of the two trend lines that define the triangle: the a-c and b-d trend line.
It is obvious that if the triangle would be an expanding one, there is no point into looking for the apex as the lines will never meet.
Therefore, once a contracting triangle is identified and finished, meaning price will move out of the range, the first thing to do is to look for the measured move as the measured move will confirm if the triangular formation was real or not, confirmed or not. More about the measured move of a triangle can be found by looking at our previous projects here on Binary Options Academy.
Support and Resistance
After the triangle is completed though, there is still value to be found and that is the apex of the triangle.
What a trader should do is to identify the apex (projecting the a-c and b-d trend lines forward in time until they meet) and then draw a horizontal line to mark that level.
The standard interpretation is that future price action will find strong support/resistance areas at the apex level.
The bigger the time frame, the stronger the support/resistance area given by the apex. The same applies for the triangular formation as well: the bigger the triangle, the stronger the support/resistance area the apex will provide.
How to Build a Triangle
The very notion of the apex is a bit strange but it gives a wealth of information to traders if the triangle is drawn correctly. One has to remember, again, that a contracting triangle is travelling between the a-c and b-d trend lines and the way these trend lines are being drawn is key.
If a triangle appears as a 4th wave or as a B wave, then the trend lines should be as clean as possible as market needs to retrace to the end of the triangle. In the first instance, after the 5th wave is completed, market needs to retrace to the end of the triangle as the impulsive move is completed, while in the second case it needs to see the end of the triangle after the c wave of a zigzag is completed.
In the examples above, market is rarely breaking the apex from the first time so look for buying call options by the time the apex area comes into play for the first time if the triangle was a bullish one, and put options if the triangle was a bearish one. The expiration date has to be aligned with the time frame the market is forming the triangle. The bigger the time frame, the bigger the expiration date needed.
If the triangle is forming at the end of a complex correction, then most likely the trend lines will not be clean and this means the apex is not that important as in the first case presented above.
Complex corrections are tricky as, depending on their nature, they can be reversible or not, and if you are dealing with a reversible correction then the apex is not going to give any support or resistance. If it does, it is doing that only by coincidence.
Another thing to do after identifying the apex of a triangle is to draw a vertical line right through it as that is a visual point in time and measured move in time for the thrust of the triangle to come.
If the thrust of the triangle is not coming and price is exceeding that moment of time it means there is virtually impossible that the analysis is correct or market is forming a pattern that in the ends should be completely retraced.
Elliott Waves theory is full with situations in which the time element is taken into consideration when trading and time of the apex is no different.
It is interesting to note though that many people think that the apex is forming only after contracting triangles but that is not correct. Expanding triangles have an apex as well only that this time the apex is forming before the triangle is ending and is on the left side of the chart.
However, it is showing the same support/resistance level we’ve discussed earlier in this article.
The two video recordings that are coming with this article are showing you both situations and how to use the apex for successful trading binary options.
Triangles are patterns visible after the fact most of the times but knowing where market is going after the triangle is breaking and where to find the perfect striking price is key for any trader. All these information is being given by the apex of a triangle.