The Expanding Triangle – shelter from the storm

The Expanding Triangle – shelter from the storm

What do you know about one of the most mysterious classic patterns? The Expanding Triangle is a continuation pattern that every trader needs to know. You could turn many of your losses into profits with this method. Join me in entering the world of triangles.

Pejman Zwin

Content

The year is 1300 and it’s a stormy night on the ocean, just off Alexandria.

“The storm is intensifying, captain. I can’t see anything.” “I know the sea’s chaotic. Sheet the sails; we must be close to the port.”

“But captain, I see nothing but rain! Wait…I see light. Is that the lighthouse?”

“Yes, the lighthouse of Alexandria. Change direction and head toward it.”

Relieved after a stormy night, the sailors reached the coast and the safety of Alexandria. They were wet and cold but the lighthouse had saved them.

They brought metal from Spain and would later take papyrus from Egypt to Europe. The sailors went to the inn and celebrated there. They had made good money from this trip: that they were still alive to spend it they owed to the lighthouse.

The great lighthouse of Alexandria was one of the ancient world’s seven wonders. Its beam saved many sailors from the turbulent sea on stormy nights. The light was visible for miles and guided ships toward safety.

Now, in the modern world, there is a strong lighthouse that saves traders in the turbulent seas of ​​the markets. Anyone who sees it will be guided toward the light, soon to be set free from danger.

This ‘lighthouse’ for our times might have caught your attention already. It’s called the Expanding Triangle; a pattern that develops when there is market turbulence and a fierce battle between buyers and sellers.

Most traders don’t know which side to open a position on when higher tops and lower bottoms form. They get caught in a wolf trap and are slaughtered. I’m going to tell you how to hunt wolves instead and make money doing it.

By following this pattern, I have added almost 10% to my account in 2022, making nearly $45,000. Had those ancient mariners been able to make their money trading this pattern, their ships would have never left harbor… Stay with me, and I will talk you through this pattern, starting from scratch.

Expanding Triangle pattern in upward trends

Expanding Triangle pattern in upward trends

The Expanding Triangle is a continuation pattern that forms a descending trend, with the price subsequently continuing downward. Again, this pattern is known as the Megaphone but this time with a broadening bottom and a funnel.

This pattern is attractive for two-sided markets. Do You know why? Stay with me, and I will explain it to you.

Sellers sell aggressively and create lower bottoms, while buyers simultaneously remain confident in the asset and enter the market, providing momentum that leads to higher tops. But in this battle, both sellers and buyers lose.

The range of market movements increases, with a negatively sloping support trend line forming at the bottom of the pattern and a positively sloping resistance trend line forming at the top (see diagram below).

These trend lines diverge from each other over time. The market gets confused and it is generally better not to get into such a market. The Expanding Triangle pattern forms, however, to indicate the way out.

indicate the way out

The Expanding Triangle pattern is a correction that tends to strengthen price momentum. This pattern is a kind of triangle. But why is it only a partial triangle, with no apex? This is an inverted triangle, but its function is precisely like the triangles I have explained. Symmetrical, ascending, descending, and expanding are all continuation patterns.

If I want to rate the strength of this pattern, I will give a low score because its performance is weak; overall, it is not a powerful pattern. We need 6 major pivots to form this pattern. Three tops and three bottoms.

Price first makes top 1 and bottom 1, then makes higher tops and lower bottoms to complete the megaphone shape. Patterns consisting of more than 6 major pivots have less credibility and my advice is not to take risks with them.

Trade on an expanding triangle in an uptrend

Trade on an expanding triangle in an uptrend

When the price forms the third bottom and rises to touch the resistance line, the pattern completes, and we can wait for the confirmation of entry into a long position. After the resistance trend line breakout, the price signals that we can enter a long position. The resistance trend line should be broken with a legitimate breakout candle. The candlestick patterns can be of assistance to us.

The distance between the pattern’s highest top and lowest bottom determines the take-profit level for this pattern (see x lines on the chart below). My advice is to close your position at that first target and take your profit, because the targets are typically small and the pattern is weak.

If you employ the usual approach, the stop-loss level is excessive (I will describe some preferable alternatives in a moment) but it should be placed below the last bottom, following the pattern standards. This way, the pattern has a 1:1 risk-to-reward ratio but I know other ways that help you.

ways that help you

The first involves candlestick patterns and putting the stop loss below the breakout candle. The second method uses a pivot in the price movement. Occasionally, during its last attack on the resistance line, the price forms a small pivot or a small bottom in the lower time frame (see chart below).

You can place the stop-loss below this pivot. I have tried this way, and it is the best option. Identifying pivots is very important. I’ll go into detail about the pivot concept and its varieties in subsequent articles.

subsequent articles

Please, watch my trade on the AUD/USD chart below, in the daily time frame. I saw an expanding triangle pattern on the AUD/USD chart and waited for entry confirmation after the price broke the resistance trend line.

resistance trend line

A valid break occurred when the first breakout candle closed above the resistance trend line. I entered a long position at 0.89300 USD and placed the stop-loss under the breakout candle at 0.87500 USD to create a higher R:R. I calculated the take-profit level using the distance between the highest top and lowest bottom and set it at 0.92000 USD. I gained almost $9,000 from this position.

Expanding Triangle as a Reversal pattern

In some circumstances, the expanding triangle is a reversal pattern, and the price moves downward after forming it. The Reversal Expanding Triangle pattern has 7 major pivots.

After breaking the support trend line, the pattern becomes a reversal pattern, and the price will enter a downward trend. We can open a short position on such patterns only in two-sided markets such as forex and cryptocurrency.

forex and cryptocurrency

You just need to place a short position below the valid breakout candle and place the stop-loss above the candle or above the pattern, depending on your opinion. You can use the distance between the highest top and the lowest bottom for the take-profit level.

Further reading

Expanding Triangle pattern in downward trends

Expanding Triangle pattern in downward trends

The Expanding Triangle is a continuation pattern that forms a descending trend, with the price subsequently continuing downward. Again, this pattern is known as the Megaphone but this time with a broadening bottom and a funnel.

This pattern is attractive for two-sided markets. Do You know why? Stay with me, and I will explain it to you.

Expanding Triangle pattern in downward trends

The Expanding Triangle in a downtrend is a type of correction that develops downward when price momentum decreases. In this instance, buyers enter the market with all their strength and create higher tops, while sellers, confident of the downward trend, enter the market with all their strength and form lower bottoms.

Identifying the trend in this circumstance is challenging because the market is agitated. After the first top and the first bottom, the price enters the expanding cycle and makes higher tops. At the same time, the bottoms go down step by step.

In this case, a resistance trend line with a positive slope forms above the pattern and a support trend line with a negative slope forms at the bottom of the pattern. As a result, this pattern has two trend lines that diverge over time. We need 6 major pivots to complete this pattern, namely three bottoms and three tops.

If the price falls to the support trend line following the formation of the third top, the pattern is complete. More than six major pivots will reduce the pattern’s validity. Expanding triangles are regarded as weak patterns and can rarely be relied upon because the price does not begin a sharp downward trend after the pattern.

downward trend after the pattern.

This pattern attracts traders in forex and cryptocurrency. Because we must take a short position to make a profit, this can only be done in two-sided markets.

Trade on Expanding Triangle in downward trends

The pattern is complete when the third top forms and the price reaches the support trend line. We should wait for a breakout through the support trend line. Only after that can you place a short position. The distance between the highest top and the lowest bottom determines the take-profit level. You can place the stop-loss above the last top.

stop-loss above the last top

Other techniques can be used to place the stop loss. For example, when the price attacks the support trend line for the last time to break it, it is possible to form a slight pivot or a small top. You can place a stop-loss above this pivot (see chart below). Or put it on the breakout candle.

the breakout candle

Please take a look at my trade on BTC/USDT in the 1-minute time frame.

1-minute time frame

After recognizing this pattern in the downtrend, I waited for the break of the support line. After breaking the support trend line with a breakout candle, I entered the short position at 19308.00 USDT and placed the stop loss above the breakout candle at 19330.00 USDT.

My take-profit level was equal to the distance between the highest top and the lowest bottom, and I placed it at 19270.00 USDT. I made a profit of about $7,000 in this short position; it was a memorable day.

Expanding Triangle as a Reversal pattern

Sometimes, an expanding triangle pattern in a downward trend acts as a reversal pattern, and the price enters an upward trend after forming it. To form a reversal pattern, we need 7 major pivots: four bottoms and three tops.

After breaking the resistance trend line with a valid breakout candle, you can place a long position above the candle and put the stop loss under the last bottom. There are additional methods that I described for selecting the stop loss. The distance between the highest top and the lowest bottom determines the take-profit level in this pattern.

the take-profit level

Further reading

Market volume

Market volume

In correction patterns, the market volume typically decreases as each new wave forms. In other words, as time goes on, the market volume in the pattern declines until the final breakout.

In the last attack to break the trend line, the volume increases, so a sudden increase in market volume indicates that the price may be about to break the trend line.

We can determine that the price is prepared to break the Expanding Triangle pattern in an upward trend if the volume of the bottom three is higher than the volume of the bottom two. You can open a long position to increase your profits when the third bottom forms, but I do not advise it because it is essentially gambling.

In the expanding triangle pattern in the downward trend, if the volume of the third top is more than the volume of the bottom 2, the probability of breaking the support trend line is higher because the sellers are preparing themselves to start the downward trend.

In this case, when the price rises to form the third top, you can enter a short position at the third top price, but the risk is high, and I do not recommend it.

Further reading

The Half-Triangle Rule

The Half-Triangle Rule

There is an unwritten rule that many people don’t know about. I developed this method due to my knowledge of the financial markets and technical analysis. This technique allows you to identify the trend.

The Half-Triangle Rule

Just draw a horizontal line through the pattern to divide it into two halves, the upper and lower half. Compare the number of candles in these two parts.

If there are more candles in the upper half, the price will probably break the resistance trend line and rise. But if there are more candles in the lower half, the price will probably break the support trend line and fall.

Further reading

Expanding Triangle with 5 pivots

Expanding Triangle with 5 pivots

Expanding Triangle has different modes that you can see in the chart. I want to tell you about an interesting case of it. In this case, the expanding triangle takes the role of a continuation pattern.

Sometimes, the Expanding Triangle pattern in uptrends does not begin at the first top

Sometimes, the first pivot (see “Top written in black on the following chart) is higher than the second top. The first top does not react to the resistance trend line, and the price only enters the Expanding Triangle pattern after forming the first bottom.

forming the first bottom

This state is also present in downward trends; the price first forms a “Bottom that doesn’t count among the pivots inside the pattern. In this case, the pattern starts after the first top.

In many cases, the first bottom is lower than the other bottoms, but this is not always the case; the first pivot (or “Bottom written in black on the following chart) can exist in different forms. It can be higher or lower than the next bottom; the point is; the first bottom does not react to the support trend line.

The price enters the Expanding Triangle pattern after forming the first top and the pattern completes after forming the third top.

forming the third top

This approach works better for analyzing waves in the context of Elliott’s wave theory because, in that theory, corrective movements have 5 sub-waves. In the Elliott theory section, I will go into more detail.

Further reading

Scientist’s research on the Expanding Triangle

Scientist’s research on the Expanding Triangle

Thomas Bulkowski is one of the most outstanding researchers of classical patterns. He achieved exciting results in his research on the Expanding Triangle pattern.

Also, he researched hundreds of patterns and provided a general statistic for the price direction after the Expanding Triangle pattern.

In the following section, I will tell you some interesting points from Bulkowski, and I suggest you read them carefully. According to Bulkowski, the Expanding Triangle in uptrends is a continuation pattern 50% of the time and acts as a reversal pattern 50% of the time.

reversal pattern

The Expanding Triangle in a downward trend is a continuation pattern 47% of the time, and a reversal pattern 53% of the time.

reversal pattern 53%

He also researched the targets of these patterns. In his opinion, the take-profit level in this pattern should be chosen more accurately. If X is the distance between the highest top and the lowest bottom in this study, then Bukowski claims that if an expanding triangle pattern in uptrends is a continuation, the target should be 62% of X, and if it is a reversal, 37% of X.

In his research on expanding triangles in downtrends, he arrived at 59% of X as the target for a continuation pattern and 44% of X as the target for a reversal pattern. But Charles Kirkpatrick II and Julie Dalquist reached disappointing results in their research.

They discovered that the expanding triangle pattern is weak and the stop-loss is very high. They said this pattern is rarely found in the chart and is challenging to identify.

Further reading

Elliott Theory

Elliott Theory

The expanding triangle can be seen in classical pattern analysis and Elliott waves. You may not know much about Elliott waves, but you will learn a little about them with the following explanations.

Of course, Elliott’s waves are a much broader subject, one I will explain entirely in the future.

In Elliott waves, the expanding triangle is very helpful, and we can see it in correction waves. Of course, in the following chart, wave 2 does not reveal this triangle, but waves 4 and B do. The expanding triangle in Elliott’s theory has five sub-waves: A, B, C, D, and E.

The Expanding Triangle in Elliott Waves requires five pivots to form. This is the same unique situation I told you about before; in the uptrends, the first bottom forms first, and in the downtrends, the first top forms first.

the first top forms first

Conclusion

In this article, a useful and important pattern is introduced to you. The Expanding Triangle is one of the most interesting classic patterns. I am sure you will remember these tips because by knowing them you can get a lot of profit from the market.

Remember, the market is like the sea; it can confuse you and cost you everything. So try not to drown in it.  Do not open a position on the days when you cannot find clear patterns when analyzing a chart. Because in these markets, you get excited and make irrational decisions.

Every technical pattern needs confirmation to enter the market, so be sure to enter the position after confirmation. Do not exit the position until the price hits the target. Float on the ship of profits and enjoy it. Don’t forget capital management because proper capital management is the difference between a profitable trader and a losing trader.

Further reading