Under this sub-chapter we will see the two situations in which a contracting triangle appears: either a continuation pattern (as 4th or b wave judging by Elliott Waves Theory), or a reversal pattern (contracting triangle as being part of a complex correction, double combinations or even triple combinations) and we will analyze a couple of current market situations when such a triangle appears and how to interpret it.
As for the identification of the early signs that can warn the possible formation of a contracting triangle we will look at the elongated flat pattern, what are the rules for it, if we identify one what the next step should be, what it means, etc. The proportions between different waves of the triangle are also treated under the recordings that go with this chapter and you should learn the typical structure of a leg of a triangle and what are the most likely retracements.
One important thing to keep in mind when dealing with contracting triangles is that under such a pattern the first leg, namely wave a, is the longest, all the future legs to come should be shorter than the previous leg. This is important because you will see that based on this information we’re going to have an educated guess about the possible ending of a contracting triangle and it’s importance when trading.
Contracting triangles are tricky patterns as they can be misleading in the sense that the majority of traders look at them as price will always break on the same direction it entered, which is not true, so being able to understand this and to properly make the difference between the two will save you a lot of headaches and frustration into this complicated field technical analysis is.