Elliott Waves Theory – Types of Contracting Triangles
In technical analysis, triangles can be either contracting or expanding. So far on our Forex Trading Academy project, we’ve mentioned both expanding and contracting triangles in the sense that we defined what makes them and showed how to trade them both based on the apex level. Moving forward, a further differentiation needs to be made. Both contracting and expanding triangles are of multiple types, and this article is dedicated to the types a contracting triangle has. As a short review, a contracting triangle is characterized by five different segments, or legs of a triangle, that are forming in such a way that by connecting the a-c and b-d trend lines, the result will be a common point somewhere in the future. The standard definition calls for all the legs of a contracting triangle to be smaller than the previous one, but this is only the general rule. In reality, there are some differences and this is how contracting triangles are further subdividing.
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Three Types of Contracting Triangles
Elliott found that there are no less than three types of contracting triangles. This information is only partly true, as, later in our project we will point out to other contracting triangular formations. These three types though can be categorized as the most common ones and the main differentiation is based on the length of the triangle’s segments. That being said, as long as the a-c and b-d trend lines are contracting, the triangle is contracting. In any triangle, the key stays with the b-d trend line. This trend line is far more important than the a-c one as it shows the end of the triangle and the beginning of what may be a new trend.
Horizontal Contracting Triangle
This is by far the most common type of a contracting triangle. In such a pattern, all the waves that follow the a-wave are smaller than the previous wave, and this results in the contracting aspect of the triangle. Therefore, the very definition of such a triangle is a>b>c>d>e. The name of such a triangle comes from the fact that it is evolving on the horizontal and, starting from its beginning, the price will form a series of ups and downs around that level until eventually, they will break higher or lower. Horizontal contracting triangles may appear as the b-wave of a zigzag or as the 4th wave in an impulsive wave, as well as part of a complex correction. Out of these three possibilities, look for them to form mostly as part of a complex correction, and when this is happening, they’ll be most likely the last part of that correction.
Irregular Contracting Triangles
An irregular contracting triangle is still a contracting one, so the a-c and b-d trend lines are pointing towards a common point, but there is one difference when compared with the horizontal one: the b-wave is bigger than the a-wave. This makes it very difficult to correctly interpret and identify such a triangle and it is usually visible after the c-wave completes. Because the b-wave is the longest one, the measured move of this triangle should be calculated based on its length and it can sometimes be even more than 161.8% of the b-wave. This calls for a tremendous break and missing that break may be costly for any trader. There is an entire debate regarding the horizontal nature of both irregular and horizontal triangles. The idea behind this debate is that the irregular triangle is a horizontal one as well, as it forms on the horizontal, despite the fact that the b-wave is actually longer than the a-wave. From my point of view, because both of them are in the end evolving on the horizontal, the should be both horizontal triangle. However, this is just a semantic thing, as it is not supposed to have any influence on the overall technical analysis picture. While horizontal contracting triangles are the most common triangles, it should be mentioned here that irregular ones to form pretty often on the Forex market. This market is characterized by a lot of fake moves, and therefore when the b-wave exceeds the end of the a-wave in such a triangle it is most likely a fake move destined to attract traders on the wrong side of the market.
Running Contracting Triangle
This triangle falls into a very special category due to the fact that its ending point will be above (in the case of a bullish triangle) or below (in the case of a bearish triangle) its starting point. Running means also a pattern that will be followed by a powerful break after the triangle is broken so the b-d trend line is the one that holds the key for any entry. In such a triangle, not only that the b-wave is bigger than the a-wave, but also the d-wave is bigger than the c-wave. Therefore, when compared with the overall general definition of a contracting triangle, we have two waves that “defy” the norm, namely the b-wave and the d-wave. Still, in this pattern, the b-wave is the longest one of the whole waves that make the triangle and the e-wave is the smallest one. Such a triangle appears mostly at the end of complex corrections, like double or triple combinations, as these patterns are most likely to end with a triangle.
Regardless of the type of the contracting triangle that forms, traders should focus on the most important trend line: the b-d one. The nature of this trend line has many implications for future price action, as well as what price is doing after the break of it. For example, in a triangle that is not supposed to be followed by a strong move, the b-d trend line should not be retested until the measured move of the triangle is completed. On the other hand, in a triangle that is part of a complex correction, the b-d trend line is most of the times retested after it is broken. The a-c trend line has an important role as well, as it is rarely that this trend line is a clean one. Usually, the price is breaking it between the two points that make up the trend line and if that is not happening, the whole triangular formation should have a big question mark regarding its interpretation. All in all, look for contracting triangles all over the place and depending on the type of the triangle, one should have an idea about the future price action to follow. Knowing all the possible types of a triangle the market can form helps the trader in deciding what the triangle stands for, where to start/end the count and what the overall Elliott Waves theory is telling about future price action.
Other educational materials
- The All-Important B Wave Retracement
- What Are Corrective Waves?
- Trade Forex with Simple Corrections
- Complex Corrections in Elliott Waves Theory
- Types of Flat Patterns
- Types of Zigzag Patterns
- Contracting and Expanding Triangles
Recommended further readings
- A Geometric Interpretation of Trade Measures. Elliott, R. and Azhar, A., 2004. Economic Integration and the Evolution of Trade: Journal of Economic Integration, 19(4), pp.651-666.
- Trade what you see: how to profit from pattern recognition Pesavento, Larry, and Leslie Jouflas. . Vol. 302. John Wiley & Sons, 2010.