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VIDEOReading the Elliott Triangle
Get an edge with this crucial trading principle.
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The triangle has been written about as a pattern in stock charts at least since the 1930s and was profiled in detail in the first edition of Technical Analysis of Stock Trends by Edwards and Magee in 1948 (now in its 9th printing).
The Edwards & Magee version of a triangle in classic technical analysis is when price boundaries coil into a shape resembling a triangle; the nonparallel upper and lower boundary lines when extended into the future intersect; and there are at least 3 touches between the boundary lines. There are other guidelines, such as the ideal distance between the base and the apex for price to breakout (two-thirds or three-quarters), and declining volume during the coiling process with higher volume on the breakout. The favored way to trade a triangle is on a breakout.
In classic technical analysis, there are 3 basic types of triangles: the symmetrical triangle (with the price range bounding between the upward- and downward-sloping trend lines), the descending triangle (when the lower boundary is horizontal support and the upper boundary is a down-sloping trend line), and the ascending triangle (when the upper boundary is horizontal resistance and the lower boundary is an upward-sloping trend).
The generally accepted outcomes are that ascending triangles breakout most often to the upside, descending triangles to the downside, and symmetrical triangles can go either way, but favor the direction of the trend preceding the triangle.
Thomas Bulkowski’s statistical study of chart patterns in 2000 titled Encyclopedia of Chart Patterns does not support the general consensus regarding breakout direction of ascending and descending triangles, and not surprisingly highlights the fact that performance increases when triangles breakout out in the opposite direction of general consensus. Statistics do favor the direction of trend breakout of symmetrical triangles, but only slightly.
This doesn't provide a trader with much of an edge when trading classic triangles. For this reason, I was surprised -- when I studied Frost and Prechter’s Elliott Wave Principle -- that Elliott triangle analysis was not more widely assimilated. The detailed characteristics of Elliott triangle patterns provided in this text produce a much higher success rate than the general guidelines provided by classic technical analysis.
The first distinguishing characteristic in applying the analysis of Elliott triangles is 5 touches. This eliminates a lot of noise and false breakouts. Specifically, a triangle is made up of 5, 3-wave a-b-c zigzags (3-3-3-3-3), labeled a-b-c-d-e. More complex 3-wave corrective combinations can make up 1 or more of the 3-wave patterns. If the pattern consists of less than 5 a-b-c waves, it's either incomplete, or it's not an Elliott triangle, regardless of the perceived shape. In classic technical analysis, I often see many tight A-B-C zigzags labeled as triangles.
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