Today, we will explain the most important concepts behind triangle patterns.
The first thing you have to know is that triangle patterns are composed of 5 waves which we can define using letters "a,b,c,d,e" This concept was created by Ralph Nelson Elliott, one of the fathers of modern technical analysis and mainly known because of the "Elliott Wave Principle."
Most of the times, we are used to observing corrections with Zig-Zag shapes These are really easy to spot because C always goes below A, and we can say, "NOW is finished." However, with triangle patterns, we need more patience, its not that easy to say "now is ready" because we never have waves that go above or below the other ones; it's a constant compression. That's the reason it is imperative to wait for 5 clear waves.
Another important concept of triangle patterns is that we can start drawing these two lines that will intersect in the future. These two lines will tend to contain the pattern until the breakout or the cancelation of it.
Ok, let's assume that you had the patience to spot a clear triangle pattern. How should I trade them?
ENTRY LEVEL: ALWAYS above "D" but much better above "B." Why? Because at that level, the price would have broken 2 resistances zones which is a strong sign for the bullish thesis. STOP LEVEL: ALWAYS below A that was the main support of the structure, so we want to exit our position if the price goes below that level TAKE PROFIT LEVELS: USE fibo extensions on the previous impulse and pay attention to two levels, 1.27 and 1.68
Important concept: Remember that context IS EVERYTHING. You don't want to trade isolated structures; you want to trade a structure and a macro context aligned with the view you have.
Final idea: Here, we have used a Real example on TSLA. We think that the best way to show these theoretical concepts is by looking for real scenarios and testing them. Here we think that the corrective pattern is not finished, and we want to observe a clear ABDE before setting confirmation areas. It's important to know also that technical analysis is not mathematic; it's closer to soft sciences/disciplines. This means that Technical Analysis is not a fundamental science that explains all the movements of the market; that would be nonsense; technical analysis provides us with statistical guidance that can help us project a probabilistic scenario which can happen or not.
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