Triangles represent one of the most popular ways that traders see consolidations on technical charts. There are numerous types of triangle pattern, however the one that is most commonly seen is the contracting triangle. Interesting, there are only a few traders who are aware that contracting shoulders, in much the same ways as pennants, flats and head and shoulders, come with a measured move, meaning that the market’s movement must travel for the triangle to be confirmed or validated. If the market does not travel the measured move, then the market cannot be making a contracting triangle, and the trader’s analysis is incorrect.
A triangle will always have five legs, neither more nor less, and each of these legs should be labelled with a letter e.g. A-B-C-D-E. The thrust of the triangle is a distance of 75% which is taken from the triangle’s largest wave and projected onto the triangle’s end, at the end of the E wave. This measured move, or thrust, must take place in order for the pattern to be confirmed. Trading the thrust of the triangle is an excellent strategy, and the pattern can be easily identified on both daily and weekly technical analysis charts.
What is the Concept of a Thrust?
The idea of a thrust is similar to a measured move that may be seen in any other pattern of technical analysis, although sometimes the measured move must take place within a particular timeframe. In some triangle types e.g. those with a limited price action to come, there will also be a time limitation within which the price must reach its particular target, and this leads to the vital time and price component which is so important to all binary options traders. Although this type of triangle is rare in technical analysis, they do form from time to time and if this triangle type forms on a larger time frame such as a daily chart, or higher, they can be very profitable as there are limitations to drawing the B-D and A-C trend lines too.
Usually, an expanding and contracting triangle will form at the end of a complex correction, and these triangle will have broken their B-D trend line and will have been retested. Although the retest does not always have to have taken place, it acts as a good confirmation of the market ending with a complex correction.
All traders know that a triangle has a five wave structure with the corrective waves being labelled using letters. The triangle’s thrust will always be determined by comparing the triangle’s largest leg which will often be the A wave, although sometimes it may be the B wave. The trader should measure the longest wave’s length, take 61.8% of it to find the thrust of the measured move that the price should travel following the competion of the triangle. However, should the triangle be forming as a continuation pattern or x wave, while the other corrective wave remains a triangle in the same degree, then following the A wave of the final triangle, the previous one’s thrust can be considered to have been completed.
The Importance of the B-D Trend Line in Contracting Triangles
When thinking about contracting triangles, the break of the B-D trend line is important. It must not be a fake break, as by the time the trend line B-D has gone, the triangle can be said to be definitely completed. The A-C trend line is also important as this gives the trader the variety of triangle that is being formed by the market and will let them know where the triangle is being formed and whether or not it has a thrust or measured move or not.
In general, if the triangle forms at the end of the complex correction, the trend line A-C should not be clean i.e. it will be pierced with the triangle’s other legs. In this situation, the triangle will have no thrust or measured move. Conversely, should the triangle form as a zigzag’s B Wave, or the 4th wave of an impulsive move, the trend line A-C should be clean, with the trend line B-D not being retested following the completion of the triangle.
Triangles are an important knowledge source for binary options traders and give them excellent opportunities for trading as the market often forms triangular formations and therefore being aware of where a triangle is forming in the market and what can be expected to follow it is essential to executing a successful trade.
Other educational articles
- What are Japanese Candlesticks in Binary Options Trading?
- What is the Contracting Triangle Pattern in Binary Options Trading
- What are Impulsive Waves in Binary Options Trading?
- What are X Waves in Binary Options Trading?
- What is the Zig Zag Indicator in Binary Options Trading?
- Interactive evaluative model trading for resilient systems decisions, Ross, A.M., Fitzgerald, M.E. and Rhodes, D.H., 2016
- “Artificial Neural Networks in Financial Trading.”, (2005): 163-167. Vanstone, Bruce J., and Clarence NW Tan.