Forex traders say that “the trend is your friend” in the currency market. In other words, they try to ride a trend for as long as possible, buying dips in bullish ones and selling spikes in bearish trends.
The problem with this approach is that the market doesn’t trend that much. It depends very much on the currency pair and the period considered.
Of course, any EURUSD trader that was bullish this 2017 will argue that the pair was in a stable trend for most of the year. It rose from 1.05 to over 1.20 in less than six months, in an almost vertical line.The problem is that the market doesn’t form such trends often. Moreover, even during trends so strong, it takes time to consolidate, to build energy before breaking, higher in this case.
Rookie traders will argue that this is the easiest trend to trade. Simply stay long until the channel breaks.
I tend to argue with them. Because the enemy to a trading account is the trader him/herself, staying long on this time frame (daily) isn’t easy.
Traders face a tough decision in the fear/greed play: to close the position/positions before the weekend or to keep them open.
Ascending and Descending Triangles
To be more exact, this bullish trend took over 130 days. During this time, there were a few weeks where the intraday/intraweek price action was extremely bearish. That’s where the trend consolidates and when triangles form.
If the triangle breaks in the same direction with the underlying trend, it is called an ascending triangle (in a bullish trend) or a descending one (in a bearish one). Effectively, the price builds energy to break in the same direction.
Let’s zoom in the previous EURUSD chart:
We see that for over twenty-three (23!) days, the price didn’t do anything. It merely consolidated on the horizontal.
You can say what you want, but the truth is that the psychological factor in trading will see many of retail traders closing the previous long trades, booking the profits, and most of them even going short for whatever reasons.
If you add the fact that the EURUSD has a negative swap for trades kept open overnight, few retail traders bear to pay that small interest on a trade, for almost a full month.
Yet, the market formed a classic ascending triangle: a bullish pattern that only sees the price building energy around a horizontal line.
That horizontal line isn’t mandatory to look like in the chart above. The notion of an ascending or descending triangle comes from the stock market, where the patterns were identified for the first time.
Due to the higher volatility on the Forex market, the price rarely hesitates and consolidates around a horizontal line. Instead, the line has a slightly ascending or descending angle, keeping the notion of an ascending or descending triangle alive.
Ascending and descending triangles are continuation patterns. Keep in mind that the Forex market, despite the impression it gives, it consolidates most of the times.
When this happens, like it does in over 65% of the cases, a triangle forms. Triangles are the favorite way for the market to consume time, and they can be either reversing or continuation patterns.
If the trend continues in the same direction, an ascending or descending triangle formed. All traders must do is to correctly interpret the break and jump on a trade when the trend resumes.