Elliott Waves Theory – How to Use the Apex of an Expanding Triangle
When dealing with triangles, there are some general things to consider. Such things are happening in all triangles, no matter the type, and refer to the measured move, the b-d trendline retest, or the apex of a triangle. The very notion of the apex of a triangle is somehow a mystery for many traders when in reality is such a simple and powerful tool to use. As mentioned in the previous article dedicated to triangles, the a-c and b-d trend lines are the ones that define the nature of a triangle. If the a-c and b-d trend lines are contracting, or moving towards a common point on the right side of the chart, the triangle is called a contracting one. On the other hand, if the two trend lines are expanding, the triangle is called an expanding one. The apex represents the intersection point of the two trend lines. In other words, when the a-c and b-d trend lines are meeting, that point is called the apex of a triangle. While it is more common for the apex to form on the right side of a chart as contracting triangles are forming more often, the apex of an expanding triangle has many applications as well. Only the fact that is actually forming on the left side of the chart doesn’t mean that the information provided is useless.
Ways to Use the Apex in an Expanding Triangle
Because the two trend lines are obviously expanding, as the name of the triangle suggests, it means that the apex will be found on the left side of the chart. To be more exact, the apex is to be found before the actual expanding triangle. There are many ways to trade and interpret future price action based on the apex that formed in the past, and, basically, this is what technical analysis is: forecasting future patterns based on information that happened in the past. In this way, the apex of an expanding triangle is the perfect example of how technical analysis works.
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Use the Apex to Find Important Support and Resistance Levels
One way to interpret the apex of an expanding triangle is to use it to find future support and resistance levels. As a general rule, the bigger the time frame the triangle appears on, the stronger the support and resistance level offered will be. In other words, if the triangle is forming on the monthly chart, the resulting support and resistance level will be by far more important than the one of a triangle on the hourly chart. The way to find out the apex of an expanding triangle is straightforward and simple. The first thing to do is to clearly identify the end of the first four waves in the triangle, the a, b, c and d-waves. This is not an easy task as it is not mandatory for them to end at the highs/lows, so be careful with the actual internal count of a lower degree. Assuming we know that, the next thing is to draw the a-c and the b-d trend lines. Both trend lines should be expanding on the right side of the chart, right? How to find out the intersection point if they are moving away from one another? The right answer to this question is to look on the left side of the chart. If the two trend lines are expanding on the right side of the chart, it means that they are actually contracting on the left side. Therefore, the intersection point or the apex of an expanding triangle is to be found prior to the triangle formation. After the apex is found, the way to do is to take a horizontal line to mark the actual level. This line should extend on the right side of the chart and just like that we find the support and resistance level of such a triangle. The line of the apex should act as a classical support and resistance level. This means that it should prove support when the price is falling, and, if broken, it should turn into resistance. The other way is valid as resistance can easily turn into support.
Using the Apex to Tell the Nature of a Triangle
The above interpretation of the apex of an expanding triangle is the classical one and has many uses when counting waves with the Elliott Waves theory. It is, however, not the only one to be used. Triangles are further subdividing, not only into contracting and expanding ones. Based on the place of the apex, or where the apex is actually forming in relation with the overall triangle, traders will know the nature of the triangle. This is referring to what can we expect from price action that follows after the triangle is broken. Based on the apex place, price action to follow will be limited in both price and time, or actually, will have no limitations. Such a statement is a powerful one as if it is having no limitations, then all traders need to do is to wait for the b-d trend line to be broken, and jump on a trade when it is retested. On the other hand, if the future price action is not supposed to travel far away, then the break of the b-d trend line should be interpreted as a fake one and actually the whole move should be faded eventually. This is a risky thing tough as it depends very much on the type of the expanding triangle and the time frame that it forms on. If it is in a bigger timeframe, fading such a break of the b-d trend line can be an expensive thing to do
To solve this riddle, the measured move of a triangle comes into place. Such a measured move is to be applied here and it is usually referring to the Fibonacci ratio based on the longer leg of the triangle. However, because these are contracting triangles, the measured move should refer to the shortest one. An expanding triangle is a vicious pattern that forms when trading Forex markets and it is important to know what to do with it. If the time frame is big enough, like the daily one or bigger, traders have enough time to interpret the triangle the right way: its nature, if the price to follow will be limited or not, find the support and resistance level given by the apex and many other important information. In doing that, traders form an educated guess regarding future price action and this is what technical analysis in general, and Elliott Waves in particular, is: having an idea about future price action on the back of patterns that previously formed.
Other educational materials
- Defining Corrective Waves
- Use the Fibonacci Extension Tool in Elliott Waves Theory
- Different Fibonacci Levels Important When Trading with Elliott
- Trading Different Types of Extended Waves
- Placing Pending Orders When Trading with Elliott
- How to Trade 2nd and 4th Waves