Diagonal Triangles in Elliott Waves – with Trading Example
When Ralph Nelson Elliott created the Wave Principle, he discovered that there were two types of waves: impulses and diagonal triangles. Impulse waves were presented in one of our previous blog posts. Now, let’s take a look at the diagonal triangles in general and examine a recent trading example.
What are Diagonal Triangles?
Diagonal triangles substitute for impulses at specific locations in the wave structure. The diagonals look like wedges, therefore they are often referred to as wedges. They are the only five-wave structures in the direction of the trend where wave four moves into the price territory of wave one.
We can find two types of diagonals on the charts:
- Ending diagonals: The structure of an ending diagonal is different from the impulse wave. We have seen that the impulse wave had a structure of 5-3-5-3-5, the ending diagonal has a structure of 3-3-3-3-3, so all five waves break down to only three waves each.
Ending diagonals occur in the fifth wave position at times when the preceding move has gone “too far too fast,” Elliott said. They can be seen at the termination points of larger patterns, and indicate exhaustion of the previous trend. These patterns take a wedge shape within two converging lines, with each sub wave, including waves 1, 3 and 5. The sub-waves of the ending diagonal are corrective in nature.
- Leading diagonals: a rare variation of the pattern appears in the first wave position of impulses, when Wave 2 and Wave 4 overlap and form a wedge pattern with converging boundary lines. The subdivisions may trace out a 5-3-5 or 5-3-5-3-5 pattern. Leading diagonals indicate continuation of the trend. After the market corrects, but does not correct beyond the beginning of the diagonal, the trend continues in the direction of the leading diagonal.
A trading example
An example for a kind of ending diagonal is illustrated in the recent AUD/USD chart below. We can see the termination of the increasing trend after the wedge pattern. Binary options traders, who bet on “down” could make some nice profits.
The fundamentals behind the exchange rate movement are due to the bear markets in metals and some other commodities. The recent commodity boom made the Australian currency quite strong against the US dollar. Traders often took long positions also to make use of the interest rate differential of the two currencies. This situation has changed now, as economic difficulties in China caused commodity prices to decrease, so the Australian Dollar showed a significant reversal of the prior bullish trend.
Moreover, the price growth in Australia is slowing, inflation is a concern of the Reserve Bank of Australia, as it remains below the targets. So the Bank is expected to cut its interest rate in the near future. This will reinforce the downward movement. A closing price below 0.7450 will confirm the downtrend. Focusing on the AUD/USD currency pair is a good hint for binary options traders in the following months, it might bring excellent trading opportunities.