the trader's classroom collection

III. How the Wave Principle Fits Certain Trading Styles: Corrective Patterns
Figure 3-12
3. Triangles
Triangles are probably the easiest corrective wave pattern to identify, because prices simply trade sideways during these
periods. Figure 3-13 shows the different shapes triangles can take, although I find the symmetrical or contracting variety
most common. While they may be easy to spot, they can be nasty little fellows, too. To an options trader, triangles
represent time decay (and no price movement), which decreases an option’s value.
Depending on a triangle’s size, it can represent to futures traders the depletion of what I call “emotional capital.” Let me
explain. As a trader, your trading account represents one form of capital (dollars), while your state of mind represents
another (emotions). Have you ever had a losing trade that was devastating or a series of losers that made you question
yourself or your methodology? Too often, the result is that you either hesitate or pass on the next signal. Triangles,
especially the big ones with wide price swings, can eat away at your emotional capital, because you don’t know if the
market is going to go your way, or if you’ll be stopped out of the position. Often, a negative frame of mind translates into
bad trading decisions or missed opportunities.
Although sometimes troublesome, triangles offer an important piece of forecasting information – they only occur just
prior to the final wave of a sequence. This is why triangles are strictly limited to the wave four, B or X positions. In other
words, if you run into a triangle, you know the train is coming into the station.
The Trader’s Classroom Collection — published by Elliott Wave International — www.elliottwave.com
13