By: John Robinson
Study and analysis of trading patterns forms an important part of your forex education. Although they are not by themselves actionable, in that they are prone to failures and false signals, patterns and formations can be very useful as advance warning about a possible trade.
There are many formations, like head and shoulders, the various kinds of triangles, tops and bottoms, but among them arguably one of the most common and important one is the triangle.
In this article, we’ll take a brief look at what causes this formation, and its properties. The triangle formation is in most cases an indicator of consolidation. This consolidation may be followed by a reversal, or a continuation, and the triangle by itself does not say which way the price action will go.
During the formation of a triangle, traders are unsure about where the market will eventually head. In the case of the symmetric triangle, for example, there is no obvious market consensus beyond the fact that both the upside and the downside provide enough reasoning for the two groups of traders (bulls and bears) to act.
In the case of the descending triangle, there is more bearish money in the market than there are bulls, but some of the bears are willing to check the advance of the downtrend when the price action gains a lot of momentum. And the opposite is the case with the ascending triangle. This stalemate will usually be broken with new information (statistical data, market news) or new money entering the market. Indeed, triangles are very common before news releases.
There are also other formations which resemble triangles but constitute stronger signals for trading decisions. These include pennants, flags, wedges, and a number of others that are commonplace on a day’s price action. The true triangles, on the other hand, rarely emit decisive signals.
The best way of using the triangle formation, as we mentioned, is using it as justification for further investigation into the nature of the price action. When you see an ascending or descending triangle, do not regard it as a continuation or reversal pattern, as that will only be obvious after the formation has fully developed, and will have little practical value.
However, by being alert and looking for crossovers, divergences on the oscillators, and other signals on your preferred indicators your can eventually filter out the false signals as much as possible, and with successful money management eventually realize a profitable trade balance.
The important point is avoiding any preconceptions or prejudices as to what is indicated by a triangle formation. Forex trading strategies can be created on any combination of indicators or patterns, and one can profit from them, provided that it is always born in mind how fallible the strategies are.
In short, and as always, money management, and not necessarily analysis, is the key to a successful forex experience.