Triangles are a commonly appearing and well known pattern in binary options trading. It is also recognised as one of the most important patterns as all types of triangular pattern, and especially contracting ones, enable clear visualisation of current market trends.
A triangle pattern gets its name because it forms clearly in the shape of a triangle. This pattern type indicate a crossing over of two trend lines – a descending or ascending line, and a flat line. The asset’s price will waver between these two trend lines. Although there are several different triangle patterns, the most commonly found is the contracting triangle pattern.
The contracting triangle is a reference to a chart pattern in which two trend lines cross each other after one line has experienced a price break. Triangles are corrective patterns and are able to either expand or contract. They can also descend or ascend. Specifically, the definition of the contracting triangle pattern is that the triangle has a 5 wave pattern, labelled A to E and with a 3-3-3-3-3 subdivision. Each of the five waves of triangles will have a corrective nature. The triangles will always occur with a position that is prior to the final wave of one bigger degree and once they have finished, the triangles will be followed by a rapid and sharp move in the opposite direction, which is called a thrust. In the contracting triangle pattern, the first wave will always be the longest and the fifth will always be the shortest, making a wedge shape.
The Two Types of Contracting Triangles
There are two varieties of contracting triangle – either limiting or non-limiting contracting triangles. The Non-Limiting type behave slightly differently to the limiting type around converging trend lines. A non-limiting triangle can be identified more clearly by the congestion which frms close to the apex of its point. In the case of a limiting triangle, the price thrust following the final E wave should be no less than 75% of the biggest wave of the triangle. This will be the trade target. Meanwhile, in the case of a non-limiting triangle, the price thrust following the E wave has no need to be confined to a specific amount as it is usually corrective and short lived with the price predictably returning to its original trend.
There are both reversal and continuation contracting triangles. If a contracting triangle is a continuation pattern, the move that occurs before the triangle’s starting point should not be a corrective move. The type of pattern is usually representative of a powerful advance. On the other hand, a contracting triangle pattern which is acting as a reversal pattern is indicative of saturation, ad of the market trying on multiple occasions to break the lows and highs but failing, resulting in a price reversal. This type of contracting pattern should break in the direction that is opposite to that in which it originally entered.
The Best Way to Trade Contracting Triangles
When trading the contracting triangle pattern, it is important to bear in mind that these triangles come with a measured move and this can be calculated by taking the longest wave length and projecting it once the triangle is finished. The point at which the contracting triangle can be said to be ended is when the a-c or the b-d trend line is broken. This should be taken as an indicator that the price is about to make a different move, and by the time the price breaks the trend line, the length of the measured move can be applied to find the target.
Having a good understanding about the formation of contracting triangles is very important for investors in order for them to maximise their profits.
Other educational articles
- The Basics of Support and Resistance
- Continuation Patterns and Pennants in Binary Options Trading
- Reversal Patterns Triangles Trading Strategy
- What is the Dark Cover Candlestick Pattern?
- What is the Double Top and Double Bottom Pattern in Binary Options Trading?
- What are Japanese Candlesticks in Binary Options Trading?