The history of money is a work in progress. Technical analysis of a financial product cannot exist in its actual form without a triangle chart pattern. Past patterns show a future forecast, and a Forex triangle is one of the most impressive ones.
When thinking of money, modern traders don’t think of physical money. Money is as good as some numbers in a trading account. Or, as some currency pairs quotations on a Forex dashboard.
The potential gain when forecasting a currency’s value attracts traders. When trading uses a pattern recognition approach, a triangle chart pattern appears all the time.
Throughout technical analysis history, triangles appear all the time. In various forms and shapes, triangles shaped the way traders looked at a chart.
Before the PC (Personal Computer) took over our lives, technical analysis was done with pencil and paper. In the most classical way, traders looked at price charts to forecast future movements. This is money in the makings, and most of the times people look at successful traders as being modern alchemists.
Over the last decades, technical analysis changed. From classical shapes and patterns, to complicated trading theories and algorithms. However, through the years, triangles remained the cornerstone of complex trading theories (e.g. Elliott Waves Theory) and still show the basic interpretation of a market.
The idea of this article is to show how to trade a triangular formation, from basic approaches to complicated ones. In doing that, the journey will send us back in time when technical analysis started, and we’ll end up looking at modern ways to treat a Forex triangle.
What is a Forex Triangle?
Forex trading deals with currencies. Hence, Forex traders deal with currency charts. Technical analysis theories and patterns supposedly work on any financial product that moves. Currency pairs included.
Believe it or not, the currency market spends most of the time in consolidation. This may sound like a bold statement for such a huge market. Yet, it holds true.
Traders must think of ALL the products that make this market. On average, on any given day, the overall market consolidates, despite its huge volume.
The favorite way for the market to consolidate is a triangle. Knowing what a Forex triangle is and how to interpret it will help traders know the basic pattern of a consolidation.
A triangle chart pattern can form the basis of a triangle trading system. If they form so often, all traders need to do is to trade triangles.
Imagine any currency pair and its number of time frames. Triangles form everywhere! Hence, there’s a lot of trading material for the Forex triangle pattern.
A triangle chart pattern gives traders clues about its formation. Lower lows and lower highs, or higher lows and lower highs…the price action points toward a shrinking point. Levels contract, showing a contracting triangle.
Later, Ralph Elliott provided a clear definition of a contracting triangle. And an expanding one, too. We’ll cover it a bit later in this article.
For now, simply consider the price in a Forex triangle. The consolidation within the pattern shows that price builds energy to break.
If the triangle is a bullish one, price builds energy to break higher. Bulls wait for a break to buy. Or, aggressive bulls will take a risk prior to the break. The opposite occurs in a bearish triangle
Triangles as Continuation Patterns
The basics of technical analysis came from the Western world. This is normal. Wall Street and the U.S. traders invented the first concepts.
Sharp eyes noticed that before big breaks, the price consolidates. Depending on the time frame, this can take little or more time.
Imagine a triangle that forms on the monthly chart. The principle is the same, the pattern looks the same as one on the hourly chart, only the time before the break differs.
Naturally, in a bullish trend, triangles show future ascending prices. An ascending triangle chart pattern shows pressure to the upside. Bulls barely wait for the price to start moving.
Above is the USDJPY weekly chart. It shows how the price moved after Bank of Japan announced the start of the quantitative easing program. This happened a few years back and it made the JPY fall.
There are no less than four ascending triangle chart pattern formations in this chart. Every time price consolidated, it did that forming a Forex triangle.
When trading triangle patterns, the focus stays on the upper trend line. That is if the triangle forms in a bullish trend.
Therefore, traders place a pending buy stop order on the break of that trend line. The previous swing (or the last higher low) is perfect for the stop loss. Ideally, 1:2 or 1:3 risk reward ratios would be part of the trading system.
Any triangle chart pattern from the time frame above worked with this strategy. Now, imagine ALL the time frames and ALL the currency pairs available. You won’t need any Forex triangle indicator, but a simple strategy that works.
In a descending triangle chart pattern, everything stays the same. However, the pattern shows weakness. Hence, bears control the market. They’ll try to sell.
Reversals with a Triangle Chart Pattern
Triangles may appear mostly as ascending or descending pattern. But even more, interestingly, they form as reversal patterns too.
A Forex triangle as a reversal pattern doesn’t suit every trader. Conservative traders won’t risk trading it.
However, aggressive ones will always look for a solid risk-reward ratio. A triangle chart pattern like this one offers such a reward.
The EURJPY chart below shows two triangles. The first one is a Forex triangle in the middle of a trend. A bearish trend. As such, this is a descending triangle chart pattern.
The moment the lower trend line broke, the bearish trend resumed. Yet, the bears didn’t manage to push the price much lower. Another triangle formed.
Remember the earlier strategy? In this case, selling the break with a stop loss at the previous lower high and a 1:3 risk-reward ratio worked again. Another successful trade following a simple Forex triangle strategy.
The triangle that followed is even more interesting. It forms at the end of a trend. Whenever this happens, the triangle chart pattern forms at the bottom/top of a trend.
In this case, it formed at the bottom of a bearish trend. While the time frame is a big one (the daily chart), being patient paid.
Just wait for the upper trend line to break higher, go long on the break and place a stop loss at the previous higher low. The 1:3 rr ratio came in a heartbeat.
Interpreting a Symmetrical Triangle Chart Pattern
Over different time frames, triangles reflect changes in price. Moreover, they show potential price continuation or reversal.
To me, they look like the perfect pattern. A triangle trading pattern strategy never fails if the proper risk-reward ratio is part of the system.
Most of the triangles form on the horizontal. That means, the price consolidates on the horizontal, simply making a series of higher lows and lower highs until it breaks lower in a bearish trend.
Such Forex triangles show symmetrical price action. As such, the concept of a symmetrical triangle appeared.
The Elliott Waves Theory refers to a symmetrical Forex triangle as a horizontal one. If the triangle contracts, Elliott called it a horizontal contracting triangle.
Only the name differs. The outcome is the same.
Horizontal Contracting Triangle Trading Strategy
Elliott found triangles form often. Too often to leave the price more room for interpretation. As such, he developed a set of rules that define a triangle chart pattern.
The Elliott Waves Theory consists of dealing with impulsive and corrective waves. In a triangle, Elliott said the market only corrects.
According to Elliott, a triangle has five segments. No more, no less. All of them show corrections or consolidations. Because of that, traders should use letters to label the five segments.
Naturally, following the above statement, a Forex triangle within the Elliott Waves Theory looked like the one below. The a-b-c-d-e labeling tells us the market forms a triangular formation.
The idea of a contracting triangle is that price consolidates in such a way that the a-c and b-d trend lines contract. They will meet somewhere on the right side of the chart.
In an expanding triangle chart pattern, obviously, they won’t meet. The two trend lines move away from each other.
Out of the two trend lines that make a triangle, the b-d one is the most important. All eyes stay on the moment it gets broken.
Elliott developed many rules the price must follow in a triangle. Moreover, he looked as a triangle chart pattern as projecting future prices.
One of the Elliott rules states that the b-d trend line MUST be clean. In plain English, the price should not pierce it. More exactly, no parts of the c and e-waves should pierce it.
When the trend line breaks, the triangle ended. Hence, the previous trend resumes, so traders can jump in as the train left the station.
Wait for a Forex Triangle’s Retest
Depending on the nature of the triangle, Elliott found that most of the time the price retests the b-d trend line. That makes the whole triangle chart pattern to be retested.
That’s a great entry for a new trade. Take the previous triangle. The retest of it was a great place to sell the pair. When price managed to climb back above the b-d trend line, the pattern gets invalidated.
The EURGBP chart above shows an ascending triangle trading strategy. This strategy uses the principle mentioned earlier.
Simply wait for the b-d trend line to break and for the retest. Go long on the retest with a stop loss at the end of the triangle (the e-wave).
Use an appropriate 1:2 or 1:3 ratio as your strategy. The retest is one of the most powerful triangle chart pattern technical analysis setup.
What’s interesting about the Forex triangle above is the nature of the two trend lines. While they contract, the angle descents. Yet, the triangle breaks higher.
For an Elliott trader, this triangle comes at the end of a complex correction. Usually, the correction forms before an explosion higher in a bullish trend. Or, lower in a bearish one.
As such, the triangle’s b-d trend line break and retest give the entry for a wonderful setup. More importantly, for a powerful one.
This only show the complexity traders face when interpreting such a triangle chart pattern. A triangle can take various shapes and forms. This is especially true in the Forex market, where fake moves and swings dominate price action.
Rookie Elliott Wave’s traders would argue the labeling is incorrect. The price pierces the b-d trend line before the triangle’s end.
However, a closer look tells differently. While the price does that, it is part of the d-wave.
Triangle Forex Pattern Trading Example
Now I will show you a video of how to trade the triangle chart pattern in Forex. The video will briefly show you how to approach this trading pattern with the respective market order. You will learn how to enter the market, where to put your Stop Loss and Take Profit orders.
Simply enter your details and you will be able to see the video for free!
How to Trade Triangle Chart Patterns – Other Ways
In time, other ways to trade a Forex triangle appeared. The idea is to anticipate when the triangle ends and to use an appropriate risk-reward ratio.
Yet, the most conservative approach is to wait for the triangle chart pattern to break before entering a trade. While the risk-reward ratio is smaller, the chances for the trade to survive increase.
Trade the A-C Trend Line Pierce
A common characteristic of a symmetrical triangle chart pattern bearish traders use comes from the a-c trend line. Almost always the e-wave pierces it ahead of the b-d trend line’s break.
This represents a tremendous opportunity for traders that want to trade the triangle ahead of its break. In a bearish triangle, traders wait for the a-c trend line’s piercing and then go short for a 1:2 or 1:3 risk-reward ratio. The highs in the c-wave give the stop loss.
The USCHD chart above shows the 1:2 or 1:3 reward came even before the b-d trend line’s break. It is just another way to trade the price action within the Forex triangle.
But such a trade doesn’t make sense all the time. When the end of the e-wave is very close to the c-wave’s end, the trade is riskier.
You see, Forex trading is a game of opportunities. And stop hunting. High-frequency trading algorithms often go for the previous swing high or low before reversing course.
Conservative traders will not take this trade. However, by the time the b-d trend line breaks, they’ll go for the conservative trade. Yet, they missed a good opportunity given by the a-c trend line’s piercing.
Internal Fibonacci Ratios Within a Triangle Chart Pattern
Fibonacci ratios work great with triangles. In fact, almost every trading theory uses the Fibonacci numbers and ratios. The golden ratio (61.8%) is found everywhere in technical analysis.
The Elliott Waves Theory, for example, uses the Fibonacci ratios to distinguish different patterns. Including triangles. Moreover, the inner trading within the patterns looks at Fibonacci ratios.
The EURGBP triangle from above shows the perfect example. The market obviously forms a contracting triangle.
This is clear at the end of the pattern. However, do we have any clue ahead of the triangle’s break? Yes, the golden ratio gives it.
In a horizontal triangle, the b-wave cannot end at the 61.8% retracement of the previous a-wave. If the price does this, the pattern is not a Forex triangle.
Hence, traders use this small piece of information to trade the triangle accordingly. Namely, in this case, sell the 50% retracement. The 61.8% level represents the stop loss and the 1:2 or even 1:3 risk-reward ratio gets filled.
There’s no other internal Fibonacci ratio within a contracting triangle that traders can use. Moreover, the one presented here works only in a symmetrical triangle chart pattern.
In other triangles, like irregular ones (when the b-wave’s length exceeds the a-wave’s length), the 61.8% ratio holds no value. The same in the case of a running triangle.
As a side note, this is just another example of the a-c trend line theory mentioned earlier. The price comes and pierces the trend line before the b-d gets pierced. However, wise traders will skip this trade: the risk-reward ratio doesn’t make sense. The end of the previous c-wave is too close.
Triangles form everywhere. On every currency pair, on every time frame. The beauty part of trading a triangle chart pattern is that the risk-reward ratio allows for great trades. No matter the time frame.
In any pattern, no matter its structure or shape, traders must first control risk, then the potential reward. The first concern is the potential loss. Then, the focus shifts on the potential profit.
A triangle chart pattern allows for great risk-reward setups. Given the number of the currency pairs available (twenty-something pairs) and the potential time frames (monthly/weekly/daily/hourly or even lower ones), these setups come and go continuously.
The trading methods presented here varied. From simplistic approaches to combining different technical aspects, they all have one point in common: a triangular pattern.
Because the risk-reward ratio gives a disciplined approach to trading, all traders need is a pattern. A pattern where such ratios work. A Forex triangle is such a pattern.