Elliott Waves Theory – Trading the Apex of a Contracting Triangle
Contracting triangles are corrective waves that are forming either as simple corrections or part of complex corrections. According to Elliott, they are very common as complex corrections are forming most of the time when the market is consolidating. Treating a contracting triangle is subject to a lot of factors that a trader needs to consider: internal Fibonacci relations between the legs of the triangle, the a-c and b-d trend lines requirements, as well as the apex of the contracting triangle. All of them are equally important in the overall analysis and a proper interpretation will lead to finding the right pattern that will follow the contracting triangle. However, the apex of a contracting triangle requires special attention.
Three Ways to Use the Apex of a Contracting Triangle
Just to be clear we’re on the same page, the apex of a contracting triangle represents the intersection point of the two trend lines that make the triangle: the a-c and b-d ones. It can be used in identifying future support and resistance levels, just like in the case of an expanding triangle, but also to find out the measured move when price breaks as well as the time when that target should be reached.
Support and Resistance Level
Perhaps the most important way to use the Apex is to find out future support and resistance levels market will form. This is valid though only when the Apex can be identified relatively close to the actual triangle. Otherwise, if the two trend lines are almost parallel, the apex is of no use for the overall market interpretation. After the a-c and b-d trend lines are being drawn, the thing to do is to project the on the right side of the chart in order to find out the apex. Once that is in place, a horizontal line should be drawn. This line represents the overall support and resistance level for future prices and gives a pretty good idea about what to do when future prices reach the apex level. In other words, if the price is breaking higher out of a contracting triangle and then reaches the apex level, it is not wise to stay on the short side anymore.
I’m not saying one should go long, but at least shorts should be closed on such a move. It is most likely that a bounce is about to come.
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Find the Measured Move of a Triangle
A triangle, like other patterns, can be either a continuation or a reversal pattern. If it is a continuation pattern, the contracting triangle can be a pennant or part of a complex correction that will eventually break in the same direction as the direction prior to the triangular formation.
On the other hand, when contracting triangles are forming as part of complex corrections, they usually form at the end of the correction and therefore are reversal patterns. In both cases, a measured move can be calculated based on the type of the triangle.
This measured move is strongly related to the longest leg of the contracting triangle. In such a triangle, the longest leg can be either the a-wave or the b-wave.
If the a-wave is the longest leg of the contracting triangle, the triangle is called a horizontal one. If the b-wave is the longest one, the triangle is irregular. The measured move is a Fibonacci ratio based on the longest leg, and it varies from 75% in the case of a horizontal triangle, all the way to more than 161.8% if the b-wave is the longest wave out of the five ways that make up the triangle. Such a measured move, in some cases, is strongly related with the apex, but it a way that has nothing to do with price, but with time. It is very common that the measured move should come in the time zone of the apex, and this brings an extremely important characteristic to the overall trading concept: price and time in the same place.
Price and Time with the Apex
As a continuation to the previous paragraphs, the apex is giving the time element for a trade to come to fruition. Time is an extremely important element in trading and Elliott found a great way to integrate it into the overall theory.
For years, price and time was, and still is, the holy grail in trading. Knowing to put a time on a price forecast is as important, if not even more important than the actual forecast. Time can be used as a stop loss tool as well, in the sense that if the market is not making a specific move into a specific amount of time, the forecast or the analysis is considered to be incorrect, and the trade should be closed. It doesn’t mean that a profit wasn’t being made. It only meant that time expired and the overall picture needs to be re-interpreted. This is exactly what the apex of a contracting triangle is showing. This apex is being used most of the times as a support and resistance level, so it is referring to the actual price. However, it shows the time element as well. The thing to do is to take a vertical line this time and to place it exactly on the intersection point of the a-c and b-d trend lines, or at the apex point. This is the time that price has to reach the measured move of the triangle. If the measured move is not coming in approximately the time zone of the apex, the contracting triangle should be interpreted in a different way. To be more exact, when a contracting triangle is part of a complex correction, the measured move is coming most of the times well before the time zone of the apex. However, when the measured move is reached in the time zone of the apex, the next thing to do is to look for a sharp reversal into the support and resistance area given by the apex. This means the price will turn to the horizontal line that marks the apex point. Trading with the apex of a contracting triangle is a rewarding way to find out both reversals and continuation patterns in the Forex market. While some may look at the apex as being not that important, a correct analysis and interpretation of a contracting triangle can only be made by taking its apex into account. The next article here on our Forex Trading Academy will deal with different types of contracting triangles and one should consider all the ways the apex of those triangles can be used. Only this way, a complete technical analysis of a contracting triangle can be done.
Other educational materials
- Defining Impulsive Waves
- 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
Recommended further readings
- “Insider Trading (PLI 2d ed. 2006).” Wang, William KS, and Marc I. Steinberg. (2006).
- “Stock Market Insider Trading: Victims, Violators and Remedies-Including an Analogy to Fraud in the Sale of a Used Car with a Generic Defect.” Wang, William KS. Vill. L. Rev. 45 (2000): 27.