Contracting triangles appear quite often in the forex market. When the market consolidates, the pattern that is most often thought to be forming is a contracting triangle.
Elliott discovered various types of contracting triangles, with the horizontal contracting triangle being the most common. This type of pattern features legs that are all smaller than the one previous. Hence, if the pattern is labelled a-b-c-d-e, a horizontal contracting triangle would feature a>b>c>d>e.
In the example below, the EUR/USD daily timeframe formed a horizontal contracting triangle over a period of two years. During that period, knowing the rule that each wave must be smaller than the previous wave, helped investors position correctly during and after the triangle’s formation.
The beauty of triangular patterns is that they all have a measured move, the minimum distance the price should travel after the triangle breaks. Elliott established that all triangles, whether contracting or expanding, evolve between the a-c and b-d trendlines. In all cases and in all types of triangles, the b-d trendline is the most important. Its break signals the end of the triangular formation. However, it also gives a target for the measured move.
One essential rule to understand is that if the price action following a triangle’s break doesn’t reach the measured move, the triangle is invalidated. The measured move is also known as the thrust. And, in the case of a horizontal contracting triangle, its thrust is around 75 percent of its longest wave. In this case, the a-wave.
In the chart above, the black line projected from the end of the triangle (e-wave), shows the thrust and the price that confirms it.
Even a few months ago, the EUR/USD price action formed another triangle around the 1.25 area a few months ago, as illustrated in the picture above. This time, however, the b-wave is the longest wave. Its structure remains a-b-c-d-e, but a<b>c>d>e. Hence, the thrust of the triangle is 75% of the b-wave, projected from the triangle’s end.
One thing to add: this type of pattern is called an irregular contracting triangle. This triangle’s thrust can easily reach values bigger than 161.8% of its longest wave. The reason comes from the fact that the triangle formed at the end of a trend, acting as the last section of a complex correction.
There is another type of contracting triangle which has the most significant thrust of all: the running variation of a contracting triangle. Running triangles rarely appear on the forex market and when they do, they resemble a rising or a falling wedge. It is the only time a wedge will break the other way. When this happens, you have just witnessed a running variation of a contracting triangle. Its thrust can reach around 261.8% of its longest wave, and in some cases even more.
- The thrust of a contracting triangle is the measured move.
- All legs of a horizontal contracting triangle are smaller than the previous ones.