Reversal patterns imply price is breaking in the opposite direction when compared with the previous trend prior to the consolidation pattern and this is happening most of the times with triangles.
In terms of Elliott waves, triangles are considered to be patterns that signal either continuation or reversal conditions. In our case here we’re looking for reversal conditions and the things to take into consideration is the price action/structure before the triangle formation.If this is corrective, then the triangle might be the end of a double or a triple combination and this kind of triangles always break in the opposite direction.
Triangles Forex Trading with EURUSD – Example
The videos are showing what a triangle is, how many legs it has, and what to be expected. The most important trend line is the b-d trend line and this is the moment one should look for placing the trade.
Our examples deal with EURUSD pair and recently, on the four hours chart we had price making two contracting triangles that acted as a reversal pattern and each and every time the triangle has been broken (meaning the b-d trend line has been broken) price never looked back and that was the appropriate moment to buy put options.
In one example price is retesting the b-d trend line and while this is just a confirmation that the analysis is good, it is not mandatory for price to do that. For more details see the videos.
Triangle Shows Market is Consolidating
There is no other pattern more common than the triangle in the sense that whenever market is consolidating, most likely a triangle is forming. If you look at the Asian session and see that market is not really moving, then that is a triangle most likely or at least a leg of a triangle. Triangles can be contracting or expanding, and this means that the a-c and b-d trend lines are either pointing towards a common ground somewhere on the right side of the chart, or they are never going to meet on the right side of the chart as they are moving into separate directions.
Indicating Complex Correction
When they act as reversal patterns, they are basically at the end of a complex correction and it means that before the triangle we should have a so called connective wave. This connective waves makes the “connection” between two simple corrections and the last one which usually is a triangle.
Depending on the type of the triangle, the whole complex correction can be retraced and this means we should adjust the expiration date in cse we are trading options, according to each and every time frame the triangle is forming. Basically one should look for a trend, a bullish or a bearish one, and if that trend is ending with a triangle then we’re looking for a reverse.
The Right Stirke Price Shown by the B-D Trend
However, when is the perfect striking price? The answer lies with the b-d trend line in the sense that after it is broken, then market should advance (if the triangle is at the end of a bearish trend) or decline (if the triangle is at the end of a bullish trend). In the first case, BUY CFDs/CALL options are recommended and in the latter one, of course, SELL contracts/PUT options. These kind of triangles are not having a measured move as the measured move comes only when we can take the time element into consideration. Not here. However, they have thing in common and that is the retest of the b-d trend line.
A retest is basically our strike price for intended to trade as market should violently break higher/lower depending on the type of the triangle. It is so happening that these patterns, the complex corrections, are forming as corrective waves and this means they should be followed by impulsive moves as well.
Following a Triangle – an Impulsive Move
For example, after such a triangle almost always an impulsive move is coming and this means a fast moving market as the correction is either the end of a second wave and a third one should come, or the end of a b wave of a flat and the c wave should come. The other possibility is that such triangles are appearing as the entire leg of a contracting triangle of a bigger degree and in this case most likely the leg is not going to be completely retraced.