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Technically a triangle is market action that is moving in a narrower and narrower range.
Here is an extract from my new book:
Section One – What is a Triangle?
I cannot do better than illustrate this with a chart; I will use the triangle on £/$ which looks like this:
The key feature on this monster triangle is that since the low in early 2009 the market has been moving sideways guided by the two trendlines I have drawn on the chart.
You will also notice that I have labelled the first leg up as A, the next downmove as B, etc. This labeling follows the manner in which Elliott Wave Theorists label charts, with impulsive moves being labelled 1-2-3-4-5 and corrective moves being labelled a-b-c. Although a triangle is one of the configurations that Ralph Nelson Elliott identified back in the 1930s you need have no knowledge of Elliott Wave Theory to understand what I am saying here.
Documentation
The key point with triangles is what is called documentation; all this means is that the two trendlines forming the triangles are well documented by the market touching (aka kissing) the lines and then reversing.
If we look at the upper trendline in the chart above we can see the market moves up to the line at points A and C. Those are the only two points and, in fact, the trend line is drawn based entirely on those two points. At this stage the upper trendline has no further documentation but we are now seeing wave E and this should hit this line at $1.65.
In the video clip I mentioned in the introduction I said that when this happens “all hell will break lose!” But I intend to be a lot more precise in this book and we will get to that shortly.
As a general rule a triangle is formed of five waves and these are labelled as A-B-C-D-E in the chart above. All of these are complete except wave E which has a target at $1.65.
OK, I have shown you how a triangle looks and how it is formed but what is it?
My favourite analogy is that it is a “coiled spring” and all that market energy since the beginning of 2009 is being coiled tighter and tighter; tighter and tighter – until…
BANG!
It is released.
Here is an example of just that:
There are actually two triangles on this chart but, at this point, I’m talking about the one near the middle of the chart with the arrow saying “we bought here” – at that point gold was below $1000 and this was one of my better trades in 2009!
We will be looking at the second triangle, near the end of the chart, later in this book.
But you can see that once the energy in the first triangle was released gold shot above $1000 to then see a high above $1900, in fact it came very close to doubling in value over a two year period – if that does not convince you that I am talking potent stuff here, then nothing will!
OK, that’s what triangles are – nothing too complex there. Next, onto how we trade them…
But for that PLUS details of all the juicy trades soon to be available you will need to buy the book!
The book is less than £5 and you can find it at…
http://www.harriman-house.com/products/books/871340/trading/John-Piper/Trading-Triangles/1233
