I’ve traded a lot of different markets in my career. Stocks, bonds, energy, commodities, metals, livestock, currencies, even cryptocurrencies…
The pattern I’ll show you today foretells big moves in all of them.
In fact, you could slide any price chart of any market in front of me and my method of analysis would be the exact same.
That’s because every market is comprised of one larger overriding pattern. And, at any given time, it‘s possible to pinpoint exactly where in that pattern a market likely is.
In today’s essay, I’ll walk you through a trade setup that uses this pattern. Once I discovered it, I was able to make better sense of sloppy-looking charts – and make massive profits trading them.
Read on, and learn how to start applying it to any market…
An Indispensable Forecasting Tool
In Wednesday’s Money Trends, I introduced you to the Wave Principle – and specifically, this overriding pattern…
To recap: this pattern basically tells us what moves to expect in an asset.
After identifying the first few waves, we can use this pattern (along with three key rules) to determine when the asset will move next – and in which direction.
(For a bear market, simply flip this pattern upside down.)
Today, we’re going to focus on one of my favorite trade setups using this pattern.
But before we dive in, it’s crucial to understand the different kinds of waves that make up the overriding pattern above…
The Key to Successful Trading
There are two kinds of waves: motive waves and corrective waves.
Motive waves propel the market in the direction of the larger trend.
There’s also a specific type of motive wave called an “impulse wave.” And these impulse waves always develop in five subwaves (waves 1-5 in the chart above).
Corrective waves, on the other hand, are counter-trend movements. And they tend to develop in three subwaves (waves A-C in the chart above).
Corrective waves mess traders up because they tend to be choppy, sloppy, and time-consuming. Trying to trade a corrective wave is usually a futile effort.
The key to successful trading is being able to understand when the market is correcting… and then staying out until the market is ready to trend once more.
Here’s how to tell…
My Favorite Trading Setup
Let’s take a look at my favorite trading setup: the triangle.
Triangles are a very special wave pattern because they can only occur at very specific points on a price chart. They take shape in Wave 4, Wave B, and as part of the final sequence of a more complex corrective pattern.
The movement that follows a triangle is known as the “terminal thrust.”
This is why triangles are so exciting to trade.
They give you the direction for your next trade… and also warn you of an imminent change in trend. They’re also highly specific. They only take shape when certain conditions are met.
Triangles are made up of five subwaves, labelled A-B-C-D-E. (Note: These subwaves are not an impulse wave – they’re a corrective pattern.)
Take a look at the chart below…
Here we have a typical triangle formation, drawn on top of our overriding pattern.
Once the A, B, C, and D waves of the overriding pattern are completed, you can draw a trendline connecting the A-C and B-D points. That’s what forms the triangle.
Oftentimes, the E wave will shoot over or under the A-C trendline. But, so long as Wave E does not go past the extreme of Wave C, the triangle is still valid. It is also fairly common for Wave B to exceed the extreme of Wave A.
Trading triangles is very simple, but it requires patience. Triangles tend to move sideways for a long time before they complete.
I like to wait for the price to break the extreme of Wave D, which gives me confirmation the pattern is complete. I place my protective stop just beyond the extreme of Wave E.
Our Setup in Action
Now that you understand how triangles work, let’s look at two different triangles that have popped up over various markets recently.
First, we have a great example in Bitcoin…
Notice the overall sideways movement of this triangle… And notice how the pattern itself formed in the Wave 4 position.
Also note that once we broke past the extreme of Wave D, the price thrust up and out of the triangle.
Next, we have a triangle that broke out in the USD/RUB currency pair…
Note the similarities between the two triangles we’ve studied so far.
The USD/RUB triangle also took place in the Wave 4 position. And it also had a sideways look to it.
An Essential Trading Tool
Using triangles with the overriding pattern of the Wave Principle is a vital part of any trader’s toolkit.
It’s so valuable because of its versatility (remember, this pattern works across all markets) and how it can bring tradable structure to a messy-looking chart.
Once you grasp the basic concepts of these patterns… and once you start implementing them in your chart analysis… you’ll be shocked at how many tradable setups you’ll see that you couldn’t spot before.
Whenever I spot a big trade opportunity using this pattern, I’ll write up my thoughts and send them to your inbox.
But don’t hesitate to start using it now… It’s a game-changing tool that few traders know how to use effectively.
Editor, Money Trends