Technical Learning: Contracting, Ending Diagonals and Expanding Triangles

To continue with triangles, let me cover 3 types of triangles today. Contracting , ending diagonals or wedges and Expanding. Like all patterns, these too can be found in both Bull and Bear market. Bullish or bearish pattern is determined by direction in which prices are expected to move once the pattern is complete. In the below examples the prices are expected to reverse downwards hence these are 'bearish triangles' ( even though the prices in the pattern itself may be moving up). The shape of these triangles in bullish will be exact opposite i.e. 'A' leg will be pointing downwards.





Contracting, ending diagonals and expanding triangles

Important characteristics

Contracting triangles:

1. 'A' leg defines the overall range of pattern and is the biggest leg and rest of the legs are formed within same range
2. Each subsequent leg is smaller than the previous leg and the overall pattern forms a compressed or contracting structure (compressing price action just like a spring)
3. When the pattern is complete, the compression of prices stops (its unsprings) and gives a violent thrust
4. Prices move very fast once the pattern is complete
5. Buy/sell is recommended once the price breaches B-D support line ( line joining B and D leg of the  of triangle)

Wedges/ending diagonal:

1. Similar to contracting triangles only difference is that C leg though smaller than A leg, makes a new high.
2. 'D' leg is smaller than B and must finish above 'B' end point.
3. 'E' leg may or may not cross C but it should remain smaller than 'C'
4. Again, buy/sell is recommended once the price breaches B-D support line

 Expanding Triangle:

1. Most confusing of the lot as prices keep on expanding and making newer higher and newer low with every move
2. E leg is the largest and can be as much as 261.8% of C leg making it difficult to predict the end point
3. Price action that follows upon completion of triangle is very slow ( making it even harder to trade)
4. For entry point, either wait for  E leg to touch A-C line and reverse from there or if it crosses A-C line and enter below it again then buy/sell.
5. Though its not mentioned in the chart above, E leg can sometimes be smaller than D leg. In such cases wait for prices to go below D leg before initiating buy/sell

I know this can sound fairly complicated but trust me its not that difficult once you start recognizing patterns.