Triangles can be either contracting or expanding and one thing to remember is that most of the times they are coming as continuation patterns. The nature of a triangle is being given by its trend lines. If the trend lines are pointing towards a common point in the future, then the triangle is contracting. If they are not supposed to meet on the right side of the chart, then the triangle is and expanding one, as basically the trend lines are moving in opposite directions.
Being a continuation pattern means exactly that: the trend prior to the consolidation are is about to resume once the consolidation ends. In our case, the consolidation area is a triangle and by the time the triangle concludes, the previous trend resumes and prices start to move again.
These types of triangles are also being called limiting triangles and this is due to the fact that price action after the triangle is breaking is actually limited and the limitation comes from the fact that after price is breaking such a pattern we should look at the thrust of the triangle to be reached for confirmation. The thrust of the triangle means 75% when compared with the longest leg in the triangle.
In this example, the triangle is forming probably an x wave, a continuation pattern, price is limited to the length of the b wave, and they all are part of a double zigzag. So the logical thing to do is to trade BUY contracts/ CALL options (in an uptrend) or SELL/PUT options (in a downtrend) when the triangle breaks the all-important b-d trend line.
Another situation where triangles are acting as a continuation patterns is to be found when they are forming the fourth wave in an impulsive move and the same as above should be applied as price action to come is still limited to the length of the future fifth wave.
In terms of Elliott Waves Theory, triangles can appear at the end of complex corrections but also as independent structures. These independent structures are giving the shape of the triangle and the place in the whole counting story.
If they are continuation patterns, then triangles are forming most likely a wave b, a wave 4 or an X wave. If we are talking about the last one, then the x waves are also called connecting or intervening waves. The reason for that comes from the fact that they are connecting two or three simple corrections and together with them the complex correction is formed.
Implementing Triangles as Continuation Patterns
As a pattern, such a triangle can be a pennant and it is worth mentioning that pennants are not necessarily forming a 4th wave but most likely are X waves. That being the case, look for the a-c and b-d trend line to be a bit different in the sense that the a-c trend line should not be clean while the b-d should respect all the rules we’ve discussed here on the Binary Options Academy for quite some time now.
Like mentioned on the project dedicated to the pennant pattern, such patterns are only bullish and the measured move applies only to the upside, so BUY contracts/CALL options are recommended. However, in the case of triangles as continuation patterns then only the b-d trend line is the one that matters so we should look at it in terms of finding the perfect strike price.
Triangle with a Limited Price Action
If the triangle is having a limited price action to follow, then the b-d trend line should not be retested as this is a strong sign indicating future price action, and therefore, depending on the time frame the pattern appears on, trades can be made, in case of binary options, with different expiration dates. For example, in a five wave structure one should look at two corrective waves and three impulsive ones, and if for the fourth wave there is a triangle, then most likely the price action would be limited.
Trading continuation patterns
Moreover, if the impulsive move is a bearish one, then trading put options after the b-d trend line is broken is not really the best idea as price should not go much further. Or, depending on the time frame the triangle is forming, SELL orders/PUT options may be required but with a short expiration date and then hedging the account with bigger expiration date CALL options would be the way to go.
Trading forex with patterns like triangle is extremely rewarding as being able to identify a triangular formation that respect all the rules gives the trader a competitive advantage ahead of markets. The most important thing of them all is the fact that all waves in a triangular formation are corrective and this means that understanding corrective waves will lead to a better understanding of triangular formations.
Concrete examples are to be found out by watching the two videos we included in the article.