Technical analysis means looking at price action and structures, or charts, and then taking an educated guess regarding the future movement the price is going to make. This is being called a forecast. Trading implies forecasting future price movements the market is going to make but it should be considered that most of the times markets are making consolidation patterns.
One of the most common consolidation pattern is the triangle, and a triangle can be either contracting or expanding. While a contracting triangle, like the name suggests, is contracting (meaning the waves are smaller than the previous wave) there is another type of triangles, called expanding triangles, and these are as tricky as a pattern can be. In should be mentioned that they are pretty rare but this is not implying that they do not exist.
Expandig triangles are most common on the currency markets and all the rules of a triangle are respected here: legs of the triangle are corrective and the triangle is traveling within the a-c and b-d trend lines.
Riding the B-D Trendline in Forex
The most important trend line here is still the b-d trend line and by the time this one is broken it means the triangle is completed. In such a triangle, all the waves after the a wave are making new highs or lows when compared with the previous wave and this means that the trader will have all the time the impression that price is going to break in one direction or the other.
The word expanding comes from the fact that the a-c and b-d trend lines are not meeting anywhere in the future, or on the right side of the screen, but on the left one, as they are basically pointing toward different direction. This implies that in a classical expanding triangle, all waves are bigger than the previous wave, namely wave a is the smallest one, the b wave is bigger than wave a, the c wave is bigger than wave b, and so on.
But then there are multiple types of triangles that fit into this category and based on any specific type these proportions may change. For example, one way to look at things is that in a classical triangle that evolves on the horizontal, assuming a bullish trend and the triangle to act as a continuation pattern, then market will form no more, no less than three lower lows before breaking the b-d trend line to the upside. This is difficult to grasp by a lot of traders.
Because each leg is going and take the highs/lows in the previous leg of the triangle, stops are being triggered and traders don’t know anymore where price is going. Also, taking into account the fact that all legs of a triangle are corrective, it means complex corrections are here as well, but distance to be travelled is way bigger than in a contracting triangle. This favours double and triple zigzags formations.
As a trader, this is a vital information as these kind of patterns have one thing in common: they channel really well so by the time the channel is broken, let’s say in a bearish downtrend, trading call options/but contracts is the way to go.
Identifying an Expanding Triangle when Trading Forex
Identifying an expanding triangle is not an easy task but they all have one common characteristic: the a-c trend line is usually broken by the e wave. Also look for the e wave to be the longest, and the most time consuming as traders will have the impression market will never turn. In fact, it is only the end of the pattern.
Variations are also possible, as for example in triangles that end higher/lower than the starting point, the pattern shows a series of higher lows so basically the rules are broken. However, it is still an expanding triangle if the b-d and a-c trend lines are expanding.
Trading binary options with these kind of patterns can be rewarding in the sense that one way is to draw the a-c trend line and then wait for the e wave to come and break it as that is pretty much mandatory.
On a break, trading call options in a bullish triangle or put options in a bearish one is the way to go. In a bullish triangle, for example, put options can be traded as well as by the time market is taking the highs in a previous wave, assuming we’re not talking about the d wave, one can trade put options. The usual caveat applies here too: the bigger the time frame, the bigger the expiration date should be.
The two recordings in this project show you a pretty rare triangle, one that evolves on the horizontal, but one that is respecting all the rules of an expanding triangle and for the sake of understanding the concept it is just a perfect one.