?The Value Of Trading Contracting Triangles And Wave Corrections

Many traders appreciated last month’s article with my most favorite wave patterns. Being able to recognize wave 3 and “end of the trend” scenarios makes sense even for non-Elliott Wave traders.

This article adds another two patterns, which I think are relatively simple to identify. That is a win-win for both wave and non-wave traders.

Today we review the contracting triangle chart pattern and the end of the wave 4 correction.

Trading triangle chart patterns

The Elliott Wave Theory explains how and why price moves as it does — with momentum and correction besides up, down and sideways. There are many variations of corrective patterns, but one particular pattern is my favorite — the contracting triangle.

The contracting triangle has many advantages because it is relatively simple to spot and trade. Why?

The key feature of the contracting triangle is that the tops and bottoms do not break. Or in other words, there are several lower highs and higher lows in a row.

The triangle usually offers 5 support and resistance (S&R) points in the pattern, although sometimes the pattern is extended with 9 S&R points.

Price can break both above and below the triangle, but there is higher chance that the breakout will occur in the same direction as the previous momentum, which means:

Bullish momentum before the formation of the triangle typically sees a bullish breakout above the triangle.

Bearish momentum before the formation of the triangle typically sees a bearish breakout below the triangle.

This pattern, therefore, offers interesting trade possibilities and entry setups for traders because the tops and bottoms represent natural and strong support and resistance (S&R) points.

The S&R levels can be used in various ways:

For bounce entries:

Long entry near support.
Short entry near resistance.

For breakout entries:

Long entry as price breaks above resistance.
Short entry as price breaks below support.

For stop loss (SL):

Long entries should have SL below support.
Short entries should have SL above resistance.

For targets (take profits):

Bounce trades can target the opposite S&R of triangle, S&R from a higher time frame or a Fibonacci level.
Breakout trades can target S&R from a higher time frame or a Fibonacci level.