There are many traders who believe that triangles are only able to be expanding or contracting, although they are correct, contracting triangles in the real trading world are unlike those seen in trading books. For example, a contracting triangle may be horizonal, irregular or even a running variation, and the same holds true for expanding triangles. It is therefore important for investors to be aware that all of these triangles are often seen in technical analytical charts.
The B-D trend line is possibly the most important line to consider when looking at triangles, however some triangles form the the trend lines C-E and even A-E, and there are even some other special variations. In all of these cases, the only condition is that the triangle contracts, meaning that the B-D and A-C trend lines will meet at some future point.
Although the contracting triangle is most commonly seen on technical charts, the expanding triangle does appear, albeit rarely.
Types of Special Triangles
As the name “Contracting Triangles” suggests, the B-D and A-C trend lines of the triangle contract, and in order to do so, the waves will become increasingly shorter, starting at the A wave and finishing with the E wave. However, this does not always happen, for example, in a formation that is irregular, the B wave will be the longest triangle leg and will be bigger than the A wave. In an irregular contracting triangle, the measured move or thrust will often be bigger and this is vital to consider when setting an option’s expiry date. By the time the trend line B-D has been broken, the triangle is considered to have been completed and this remains valid, whatever the triangle type, whether it is expanding, contracting or whether it is special.
Some triangles do not even have an A-C trend line, but will form with an A-E trend line, or a C-E one. These, however, are just variations on a theme, as any triangle which has its trend line A-C broken by its E wave will mean that in the majority of occasions, the E wave will be longer than the C wave, giving a potential trend line A-E.
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Identifying Expanding Triangles
Expanding triangles are a little more tricky, as for a triangle to be able to expand, its trend lines A-C and B-D cannot meet at any future point. All of an expanding triangle’s legs must follow a wave that is larger than the prior one, with the rules for the B-D and A-C trend lines remaining the same. If an expanding triangle is seen to be forming in a classic horizonal shape, the market probably is not forming one, and it is more likely to be a complex correction. Some expanding triangles do form quite frequently, and these are those that a formed as a series of 3 differents lows or highs.
Triangles may be difficult to grasp as a concept, but they do give binary options lots of trading opportunities, so being able to identify one, and to understand how and where they form and the best ways of trading them is essential.
The market, for the majority of the time, is in a consolidating position, and therefore when looking at the technical analytical chart for any type of market, it should be possible for a skilled investor who knows what they are looking out for to identify these special triangles forming on the chart on a regular basis. They can then use that information to help them in executing successful trades and to gain an edge over other traders.
Other educational articles
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- “Multinetwork of international trade: A commodity-specific analysis.” Physical Review E 81, no. 4 (2010): 046104, Barigozzi, Matteo, Giorgio Fagiolo, and Diego Garlaschelli.
- “State visits and international trade.” , The World Economy 30, no. 12 (2007): 1797-1816, Nitsch, Volker.