John Lansing

Technical Analysis 101: Triangles

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It has been more than 60 years since the breakthrough discovery of the Elliot Wave, and I find it to be the most relevant tool for my technical analysis today.

R.N. Elliott, a modest genius near the end of his life, began to study price movements in the financial markets. He observed that certain patterns of human behavior repeat themselves and, with the few years he had left, Elliott offered proof of his discovery by making astonishingly accurate stock market forecasts.

What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "the Wave Principle," and the implications were huge. He identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

The basic principle behind the Elliot Wave is that the price of any given security in a free market will travel in a pre-determined, wave-like advance and recessions in a semi-cyclical fashion.

Essentially, his theory maintains that price of an actively traded security will move in wave-like motions that alternate, typically, between three steps forward for every two steps backward.

These steps, or parts of the wave, are called either "impulsive waves," which are ascending in tandem with a rising trend or falling in a falling trend, or "corrective waves," which fall counter to a rising trend or rise in a downward trend.

Trading With Triangles

Using the idea of Elliot Waves, which are comprised of three steps forward and two steps back, we find triangles, which are overlapping five-wave affairs. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility.