Contracting triangle is a corrective pattern defined in the Elliott waves theory. Corrective patterns are an amazing guide to get clues about the next impulse wave. If you can locate a contracting triangle at its last phase, you can pin point price reversal zones with remarkable accuracy. Now the question is, how do you know in the middle of a corrective structure; if the pattern would complete as a triangle or something else? Well, you don’t. It all comes down to the expectation of the trader.
Elliott waves theory is not a crystal ball. Having said that, it can definitely help you produce rather astonishing forecasts. In this lesson, we will discuss how the wave principle can help us in forecasting; mainly using a possible contracting triangle pattern developing in the USDJPY Daily chart.
If you missed my previous article: How to trade using Elliott waves theory I highly recommend reading it. The trade call made in that article is still active, although the price went against us at the start of the week. Regardless of the outcome, it’s a solid trade based on sound analysis.
USDJPY Contracting Triangle forecast
Lets dive into the USDJPY Weekly chart:
As you can see, my count on the chart says that we are in the 4th wave correction. Previously I had marked a 5 wave completion right at the tip of the (current) 3rd wave. Why did I change my count to include another possible 5th wave up? The answer is in the Daily chart.
It’s a bit too early to conclude it as a contracting triangle. But the wave personality of the completed 3 legs are more likely of a triangle. So my expectation is another two waves within the corrective structure – to and from the upper trendline back to the lower trendline. Then an impulse move shooting up for the last gasp of the uptrend.
So what does a contracting triangle has to do with the change of count in the preceding trend? Well, everything actually. A contracting triangle is often formed as a 4th wave. So if this pattern completes as a triangle then I will be much confident in trading the 5th wave up.
Given this is a Daily chart, it would take months to complete the structure; even if everything pans out exactly per our expectation. So we have plenty of time to adjust, adapt and reevaluate the analysis.
In the meantime there are plenty of short-term opportunities.
So we have seen the possible C wave completion of an assumed contracting triangle and a break of structure to the upside. I would wait for a pullback to the structure after a break. There is usually a consolidation phase after every impulse – even on the lower time frames. The secret is to look for a similar break of structure in the lower time frames, so we can enter a possibly long-term trade with a tight stop-loss.
So here’s my plan of trade on USDJPY for this week. I would wait for price to pull back to somewhere around 50% and 61.8% fib retracement level. Then validate a complete-corrective-structure of lower degree. Keep in mind that price is currently undergoing a correction in many degrees. So there is no guarantee that price will reach our zone. None the less, all we have to do is wait for a clear sign for the start of an impulse move. So I will only look for long opportunities to catch the D wave of the contracting triangle.
Price forecasting is not rocket science. But you have to understand that forecast is only a forecast. So you have to be flexible and adjust your forecasts and counts along the way. If you stick to your forecasts rigidly, the market will chew and spit you out in no time.
There are EW traders who trade only triangles. Because trades off triangles are of very high probability. But you also need to have a trained eye to locate triangles when they are forming. A contracting triangle usually produces explosive moves. Because the tension of price in the last legs of a contracting triangle is so high, hence explains the contraction.
So do you agree with this contracting triangle forecast of USDJPY daily chart? Please share your thoughts, agreements and disagreements in the comments below. And don’t forget to share this article with your friends and colleagues as well.