Triangles are the third fundamental Elliott wave corrective structure. In this educational article, we will review the guidelines to trade this pattern.
The triangle structure is a corrective formation with a 3-3-3-3-3 internal sequence. Triangles usually tend to appear in waves four and B.
In this formation, volume tends to decrease as the triangle progresses. Also, it characterizes by the balance between bull and bear traders.
The following figure illustrates the trading setup for a contracting triangle. The entry is triggered once the price action strikes and closes above the end of wave (D) labeled in black degree.
To place the potential targets, we can measure the Fibonacci projection from the origin of wave ((3)) or ((A)) labeled in red, and the lowest level of the triangle. The first target will be at 61.8%, and the second target at 100%.
The trading setup is invalid if the price pierces the wave (A) labeled in black degree.
Gold, in its weekly chart, shows the guideline of an Elliott wave contracting triangle in progress. The bullish sequence starts on November 30, 2015, once the yellow metal found buyers at $1,046.54 per ounce.
The golden metal made the first rally until early July 2016 at $1,375.15 per ounce. After this move, Gold made an up and down sideways movement till late April 2019.
Now that we have identified the start of a price cycle, we have to face the question, “do I recognize an Elliott wave pattern?”
In this case, we start from the most straightforward formation, which could correspond to a Contracting Triangle.
Now that we have recognized a wave pattern, we advance to the second stage, which is to define our trading plan. Following the triangle setup guideline, we have to expect the breakout of wave (D) labeled in black at $1,346.75.
The theory says that the first profit target must be at 61.8% of the Fibonacci projection. However, this level is under the entry-level. In this case, we place the first profit target at the 100% level at $1,453.78. The second profit target will be at the 127.2% level at $1,543.80 per ounce.
The invalidation level is theoretically below the wave (A) labeled in the black degree at $1,122.10.
Now that we have defined the trading plan, the third stage is to manage the trade and risk. The first step is to reduce the risk. In this case, we move the protective stop from the theoretical invalidation level to the end of the wave (E) at $1,266.39, as shown in the next figure.
Once that we have reduced the risk and the trade advances, the trader must eradicate the risk. In this example, after Gold reached the first profit target at $1,453.78, we move the protective stop to the entry-level.
As an alternative to eliminate the risk, the protective stop could be placed considering the entry-level plus the trade costs, for example, commission costs and swap.
The last step of the trade management, before the trade reaches the final profit target, is to protect open profits. This last stage depends on the criteria of each trader.