You don't have to squint hard to see them. Watch any forex market charts long enough and you'll see them everywhere: Those moments when the price first swings wide, then less so, then the swings narrow even more… Then for a while it seems the market is stuck, going only sideways, until -- boom! -- it launches into a wild spike that takes it far and away.
Triangles. That's what Elliotticians call those contracting swings in price charts.
One of the triangle patterns in Elliott wave analysis is called just that: "contracting triangle." It's a sideways move labeled A-B-C-D-E. They appear in all time frames. "Triangles appear to reflect a balance of forces," says Prechter and Frost's Elliott Wave Principle -- Key to Market Behavior. "When a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle."
You often see contracting triangles around the time when economic numbers are released. The media always attributes post-news breakouts to the news itself, but that's not the real reason. A triangle that precedes a news release "reflects a balance of forces," and this tug-of-war between the bulls and bears simply has no other choice but to resolve, eventually, in a violent price spike.
You'll find triangles both exciting and frustrating. The exciting part is obvious: After a market has contracted, it "expands" -- i.e., presents an opportunity for traders. But when you find yourself in the throes of a contracting triangle, they can go through all kinds of gyrations for a long time before finally ending in that strong "post-triangle thrust," in Elliott wave lingo.
Which brings us to the EUR/USD, the euro-dollar exchange rate and the most actively-traded forex pair.
Now that you know more about contracting triangles, you can see that the euro-dollar has been mired in one since the early summer. It's a big triangle, too -- so the following price breakout should be commensurate.
Contracting triangles often do a great job of warning you of impending market breakouts. You can find out what the EUR/USD's triangle means for its trend now -- with EWI's instant-access Currency Specialty Service subscription.
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