-What is a triangle pattern in technical analysis
-How is the pattern constructed
-How and at what points in the pattern do you trade a triangle
Elliott Wave triangles are corrective patterns that consolidate the previous trend. Elliott Wave triangles consist of five waves labeled a-b-c-d-e. There are rules and three guidelines in the construction and identification of Elliott Wave triangles.
Rule #1: The sub waves of the triangle divide as 3-3-3-3-3
If you zoom in on the construction of the triangle, you should be able to identify three wave corrective moves for each of the five waves. (See image below)
Rule #2: The sub waves must be zigzags, multiple zigzags, or triangles.
I have mentioned many times before how the zigzag is one of the building blocks for the Elliott Wave patterns. At least four of the waves must be zigzags. One wave can be more complex like a multiple zigzag or even another triangle.
Rule #3: Wave ‘C’ cannot move beyond the ending price of wave ‘A’
Rule #4: Wave ‘D’ cannot move beyond the ending price of wave ‘B’
Rule #5: Wave ‘E’ cannot move beyond the ending price of wave ‘C’
On each of the rules above, the final three waves of the triangle become progressively shorter than the previous wave. As a result, when you draw trend lines connecting the wave extremes, the pattern takes shape of a triangle.
There are three guidelines to identifying a triangle. First, triangles are found in only certain points in the wave structure. Most triangles appear as the second to last wave of the larger sequence. For example, in an impulse, a triangle may appear in the fourth wave position, which is the second to last wave of the five-wave impulse. Triangles may appear in the ‘B’ wave of a zigzag, which is the second to last wave of the A-B-C zigzag sequence.
Typical spots in the wave structure where you might find a triangle:
- Fourth wave of an impulse wave
- ‘B’ waves of a zigzag pattern
- ‘X’ of ‘Z’ waves of complex combinations
- ‘Y’ waves of a W-X-Y combination
Therefore, when you correctly identify a triangle, it can tip you off as to the larger wave sequence because it provides a warning that the next move is likely an ending wave!
Another guideline in triangle construction is that the ‘B’ wave tends to retrace approximately 61-161% of wave ‘A’. If the ‘B’ wave overshoots and retraces 100% or more of wave ‘A’, then it is considered a running triangle. Running triangles are seen as strong indicators of a powerful trend. The trend was so powerful that the ‘B’ wave shot to a new price extreme.
Lastly, sometimes you can estimate termination points of the some of the waves in the triangle by comparing the current wave to its alternate wave. For example, you might find wave ‘C’ to be 61.8% or 78.6% the length of wave ‘A’. A similar ratio might be realized for wave ‘D’ compared to wave ‘B’ or wave ‘E’ compared to wave ‘C’.
The best way to trade an Elliott Wave triangle is to anticipate the end of wave ‘E’. Sometimes this is easier said than done. To estimate the end of wave ‘E’, use the estimation guideline noted above by measuring the length of wave ‘C’ and finding that level where wave ‘E’ is 61% or 78% of its length.
Also, draw a trend line connecting the wave ‘A’ and wave ‘C’ extremes. Many times, wave ‘E’ draws close and sometimes even overshoots that trend line. Stop loss and risk on the trade is placed at the wave ‘C’ price extreme.
Price targets can be found by projecting a fifth wave price measurement (in an impulse) or equal wave price measurement (in a zigzag). This typically yields a one to two risk to reward ratio or better.
In conclusion, I hope you found this article helpful in improving your understanding of Elliott Wave theory. I use triangles to help uncover the larger wave structure since they only appear in certain points. Additionally, if you devote your time to study Impulse waves and zigzag waves you will find most of the patterns in Elliott Wave Theory have impulses, zigzags, and triangles in them. As a result, you should be able to identify some trading opportunities without much study on the other patterns.
We have other resources to help you further your study on the Elliott Wave patterns and how to trade them. We have a beginner and advanced Elliott Wave trading guides that covers the common patterns.
—Written by Jeremy Wagner, CEWA-M
For more in depth study on Elliott wave patterns, we have these on-hour webinar recordings:
Elliott Wave Impulse Patterns
Elliott Wave Zigzag Patterns
Elliott Wave Flat Patterns
Elliott Wave Triangle Patterns
Elliott Wave Diagonal Patterns
Starting Your Elliott Wave Counting