Binary Options Trading Strategies and Contracting Triangles
The main reason behind is the theory of the over 60% consolidation period the market spends in, and the triangle is one of the forms it usually takes on.
Triangles- Contracting and Expanding
Contracting triangles are far more common than extending triangles, which can be even considered a real rarity in the market and that is why we are going to focus our attention only on the contracting triangles right now since chances are you will encounter a contracting triangle soon enough, and you might need to know few tricks.
The videos accompanying this article feature an example of the USDCAD chart that contains two contracting triangles. One triangle is a clear continuation pattern which is simply indicated by the price movement since it continues to travel the direction it traveled before the consolidation period. The other triangle is a reverse pattern or a wedge, and it means that the price changed its traveling direction after consolidation or the triangle formed.
The B-D trend Line and Its Significance
In both contracting triangles from above, the b-d trend line is decisive, since when that trend line is broken, we can say that the pattern is completed which further indicates looking for placing call options if the formation ended up in a continuous pattern, and that put options should be placed if the triangle appears to look like a reversal pattern preceded by a bearish trend.
The triangles consist of 5 legs exactly, and all of them are marked with letters from a to e (a-b-c-d-e). It can happen that the triangle appears to have more branches than the five legs which is an indication that one of the substantial legs is subdividing at a lower level. This is the case usually with wave e when it forms a triangle on its own of a lower degree. The important thing is that the five legs are still there and have the same significance even after a leg has its own sub-triangle. The five legs can help traders a big deal to achieve the desired trading results.
The Relation of the Expiry Period to the Contracting Triangle
It can get a little complicated when selecting the expiry period based on a contracting triangle since it involves many factors. First of all, the stage in which the triangle is at that moment has to be observed as well as the timeframe on which the triangle forms. The expiry period is not only related to the timeframe and stage of the triangle, but also the striking price should be observed.
Discover the Ideal Striking Price with Fibonacci
When we have a contracting triangle, we can use the Fibonacci tool to find our striking price by measuring the longest triangle’s leg, which is usually an a or b wave. Draw a horizontal line when you find a 50% retracement level. If we are dealing with a bullish triangle after a rising trend, it is more likely to break higher than to turn into a reverse pattern.
When we have such a situation, call options should be placed after splitting the 50% distance into two and before the price has moved into the new lower part.
Expiry periods should follow the timeframes on which the triangles form. For example, if the triangle appears on a daily chart, then we know that a daily expiry period might not cut it and that a week-long expiry would be better here, as well as a monthly expiry date sometimes.
Triangles in the Eyes of Elliot Waves
Contracting triangles is quite a frequent strategy, and they appear in different places on the chart according to Elliot. What traders need to know is that the triangle appears between two trend lines, like the famous a-c or b-d trend lines. We have already talked about the importance of the b-d trend line whose breaking indicates that the triangle is fully formed and that the price already travels to make new patterns.
The break of a contracting triangle, whether as a continuation or reverse pattern clearly shows and indicates strong movements in the market after a consolidation period ended. Traders know when this triangle is broken, that something big is happening in the market. It could be the release of the important economic news, or just a change of the supply-demand chain, etc.
Triangles take the shape of simple correction waves, mostly zigzag or a b wave, but they can also be formed by the fourth wave when we are dealing with an impulsive move or act as a part of a complex structure. When a triangle is part of a more complex structure or correction, it takes the role of a connective wave or the x wave, or it simply appears at the end of the complex structure.
The major secret of contracting triangles is their breaking through by observing the b-d trend line. Once it is broken, we can tell for sure that the market has moved onto forming a new pattern.
Contracting triangles have their periods when they appear, and for most of the time, it is when the market is more silent, during the trading sessions which are not that liquid and the market is not moving. This is not a surprise since we are talking about triangles which appear during consolidation periods.
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References and Further Reading:
- Naive Trading Rules in Financial Markets and Wiener-Kolmogorov Prediction Theory: A Study of “Technical Analysis” (Salih N. Neftci)
- Incorporating artificial neural networks into a rule-based financial trading system (C.N.W. Tan)
- Parallel frame rendering: trading responsiveness for energy on a mobile (Jose-Maria Arnau, Joan-Manuel Parcerisa , Polychronis Xekalakis)
- Triangles And Trends
- The Reaction of Investors and Stock Prices to Insider Trading (BRADFORD CORNELL, ERIK R. SIRRI)