Contracting triangles are one of the most common ways price chooses to consolidate. I am using the term consolidation and not correction, even though a contracting triangle is a corrective wave of it is part of a corrective wave.
A typical contracting triangle is formed out of five different waves, labeled a-b-c-d-e and it is falling into the category of threes, because each and every one of this waves is being formed out of three waves of a lower degree, or are being part of a complex three waves correction pattern.
In a contracting triangle wave a it is usually the longest one (but that is not mandatory) and all the waves to follow should be smaller than the previous one. Waves of a contracting triangle typically are traveling between the two trend lines of the triangle, trend lines that are going in two opposite directions.
After a contracting triangle completes it is usually followed by a so called “thrust” which has a measured move, and the measured move is 75% percent of the widest segment of the triangle, typically wave a.
Being a continuation pattern most of the times, one way to interpret contracting triangles after they are broken is to measure the entire length of the longest wave in the triangle, the a wave, and project that distance to the breaking point and that would be the measured move to the upside for such a pattern.
The most common type of contracting triangles is the so called horizontal variation of it, and this are the typical traits:
- the trend lines of the triangle must travel in opposite price directions;
- wave d must be smaller than wave c;
- wave e must be smaller than wave d.
There is also the so called irregular variation of a contracting triangle and according to this pattern the key stays with the b wave, in the sense that it must be longer than wave a. Other than that, all the other waves, c, d, and e should be smaller than the previous wave.
However, one of the most trickiest forms of contracting triangles are the triangles that form a running variation, and it is comparing with the confusion associated with the double three combination setup I presented to you a couple of chapters earlier.
Under a running variation, the following should happen:
- wave b is longer than wave a and is the longest wave in the triangle;
- wave c is smaller than wave b;
- wave d is larger than wave c;
- wave e is smaller than wave d;
- the thrust after the triangle would be much larger than the widest leg of the triangle, but not much than 261.8%.
The recordings that will come with this sub chapter will illustrate the types of the triangle mentioned above, with key examples of each.