3 forex books about technical analysis - Sensational Findings


Book 2

Chapter 17

Expanding triangle - unresolved problems of classics of the Forex technical analysis.

 The majority of classicists of the technical analysis have written about the expanding triangle

·  in the confused manner, which logically follows from their previous erroneous statements;

·  often it is a kind of “adjustment post factum” of “intensive” and “weak” signals under the condition of the triangle breakdown but not the practical recommendations for opening/closing of deals in the case of the triangle formation;

·  it is rather a textbook of losing traders’ deposits but not useful and valuable recommendations for the practical trading at Forex.

What is the essence of the expanding triangle problem, unsolved by classicists of Forex?

As it is demonstrated in the previous chapters, all classicists of the technical analysis recognize the fact of the triangle breakdown along the trend to be the intensive signal. For instance, one should look at                A. Elder’s chart, given below:

There is also J. Murphy’s chart

C. Luca has made the following comments on his graph: the price orienteer is located at the level 101.00, which is by 300 pips lower than the point of breakdown (104.00).

Chart 3.15. An example of the typical “bear” ascending triangle.

Further, let us examine E. Neiman’s chart.

The intensive signal (+++) indicates a good position for opening a downward-directed deal.


According to E. Neiman, all signals at the point A must be regarded as

  • the intensive signal (+++);
  • a good position for opening an upward-directed deal after getting the confirmation at the A-line level.

There is J. Schwager’s chart:

In all these charts, submitted by the classicists of the technical analysis, the so-called “intensive” signals are depicted. However, the latter can turn into false breaking through the levels as soon as the currency gets into the expanding triangle. In this case

·  every next apex is higher than the previous one;

·  every next minimum is lower than the previous one.

J. Murphy has written about the expanding triangles (“the expanding apex”).

There is an example of the most common type of this pattern (see Chart 6.5a). Here three peaks ascending subsequently and two minimums are submitted (the points 1, 3, 5 and 2, 4, respectively). The second minimum (4) is located lower than the first one (2).

 

Chart 6.5b. An example of the “expanding apex” pattern. One can meet with this pattern of recoil relatively seldom. As a rule, it indicates the reversal in the principal tendency of increase.

J. Murphy has not decided the expanding triangle principal problem – i.e., that of the false breaking through the levels. He just establishes the fact of the problem existence, being unable of finding the solution.

·  As J. Murphy states, during the model formation there arises a series of false signals, which hampers the trader’s work so much. This model also contradicts the tendency development regularity (pattern). Breaking through the previous peak level usually indicates the recommencement of the ascending tendency. At the same time, breaking through the previous minimum usually indicates the beginning (or continuation) of the descending tendency. Some trading traders make use of upward- or downward-directed breakdowns as the “call” for action. Such traders can be confronted with a series of false signals.

·  Further J. Murphy “reassures” traders in the following way. The “expanding formation” is a relatively rare model. As a rule, even if it arises, this happens on the threshold of the reversal of the principal ascending tendency at the market apex. It is similar to the expanding triangle. It contains three peaks ascending subsequently and two descending minimums. The expansion of the price fluctuations is accompanied by the gradual increase in the trading activity. This formation comes to an end at the intersection of the 2nd recession level. This crossing occurs when the market reaches the 3rd peak.

Elder’s description of the “expanding triangle” pattern is brief and unequivocal. The expanding (widening) triangle becomes formed when prices behavior makes a sequence of ascending maximums and descending minimums. This pattern indicates that the market is “getting the state of hysterical instability”. “Bears” and ”bulls” are panicking. Their combat is getting “too hot” for the ascending trend continuation. So to say, the expanding triangle “kills” the ascending trend.

The opinion of C. Luca on the expanding triangle patterns formation principally differs from that of A. Elder.

According to C. Luca, the expanding triangle pattern is a very rare model. It is the horizontal mirror reflection of the symmetrical triangle. In this case, the starting (initial) tendency, “sets against” the triangle apex – but not against its bottom. Developing according to the same mirror-scheme, the trading volume is steadily rising in the process of the pattern formation. There exist “bull” and ”bear” varieties of expanding triangles.

 In Chart 3.19, one can see an example of the “bull” expanding triangle. The latter is formed by the diverging lines of support (AB) and resistance (AC). The price orienteer is equal to the triangle width (BC). This distance must be transferred to start from the breakdown point (C).

According to the numerical data, the ascending triangle bottom width makes 92.00 – 90.00 = 200 pips. It is located above the breakdown point 92.00 (see Chart 3.19 on the right). 

 

 Chart 3.19 makes a typical example of the expanding triangle.

The expanding “bear” triangle continues the descending tendency. As Chart 3.21 indicates, the divergent lines of support and resistance (AC and AB, respectively) outline this pattern. The price target (orienteer) CD is equal to the triangle bottom width (BC). This distance must be transferred to start from the breakdown point (C).

 Let us see the numerical data in this chart (usd/jpy on the right). The bottom width is determined as 94.00 - 92.00 = 200 pips. The movement price orienteer is located at the level 90.00, which is by 200 pips lower than the breakdown point 92.00.

  Chart 3.21. An example of the typical (model) “bear” expanding triangle.

Let’s dwell on E. Neiman’s attitude to the expanding triangles.

There is a moderate signal (++).

 The confirmation from the complimentary signal.

The medium position for opening deals downwards and upwards – Chart 1 and 2 (the “bear” and “bull” trends), respectively.

expanding triangles. Conclusions made in Masterforex-V Trading System

The works of classicists of the technical analysis of Forex indicate the following.

1.  At first, any triangle can look like a symmetrical - an ascending or descending one. All classicists of the technical analysis recognize the breaking through its levels along the trend direction to be the intensive signal for opening a deal.

2.  After the false breaking through the level, this “intensive signal” turns into the ”false breaking-through”. Respectively, the triangle becomes the expanding one.

For instance, E. Neiman gives an example of opening a deal in the case of the symmetrical triangle.

There is also an example of the expanding triangle

Hence, there logically arises the question. How E. Neiman could guess that the first breaking through the previous minimum (the support) is false and one should open a deal only in the case of the second breaking through?

How one can combine this recommendation by E. Neiman (to open a deal on “sell”) with the totally opposite conclusion made by A. Elder. The latter states that the expanding triangle “kills” the trend?

B. Luca gives the analogous example. According to this author, the “cruising range” makes 200 % after the breaking-through the expanding triangle.

 

Chart 3.21. An example of the typical (model) “bear” expanding triangle.

The reader should pay attention to the following fact. C. Luca has omitted not one breaking through the level of support under the condition of the “bear” trend. In fact, he has omitted the four ones. Did he beforehand know that they were false? He opened a deal at the 5th breaking through, waiting for the “cruising range” of 200 %.

So, who are right – A. Elder or C. Luca and E. Neiman? The matter is where and towards what direction the deal must be opened. What is the “cruising range” and how one can measure it?

3.  No one of the “classicists” can clearly describe the following situations. They do not give clear criteria when backward-directed breaking through the level can yield

·  the expanding triangle (the currency comes back to the initial level);

·  the change (shift) in the trend (the currency cannot come back to the initial level in near future).

4.  L. Williams is the world champion in trading. According to him, a deal must be opened at any backward-directed breaking through the level. L. Williams recommends opening deals at the following points under the condition of the reversal.

 

At this Chart, one can see an expanding flat. The reader should imagine how many times L. Williams’s “stops” can snap into action (work)? 5 times at least!


Or, maybe, L. Williams’s “stops” do not work?

Or, maybe, the backgrounds of mistakes lay in the inaccuracy of the expanding triangle concepts by J. Murphy, C. Luca and E. Neiman.

5.  The “classicists” of the technical analysis of Forex prefer to draw the charts of the expanding triangle post factum. However, the trading trader must take the decision before the formation of the triangle of any kind and its breakdown.

For instance, is it the expanding triangle or the change in the trend?

At what point should the trading trader open a deal (and of what kind it must be - on “sell” or on “buy”)?

6.  As L. Williams’s charts indicate, a part of his deals end with losses and  “stop”. This is conditioned by the fact that the breaking-through the “zigzag” (the fractal) towards the opposite direction does not implies the reversal at all.

Hence, there arises the following question. What is the difference between the trend reversal and the expanding triangle? Knowing the answer to this question, the reader can understand

·  Why does the currency again return towards the backward direction – after “knocking off” the “stop”, put behind the minimum in the ascending trend (or the maximum in the “bear” trend). As the result, the trader loses his money again.

·  Why do they use “locks” in the Masterforex-V Trading System, except “stops”?  


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Risk Warning

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any off-exchange foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or currency pair. More over, the leveraged nature of forex trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses. To manage exposure, employ risk-reducing strategies such as 'stop-loss' or 'limit' orders. Placing Contingent Orders (stop loss, limit, etc) may not limit your losses to the intended amounts”

 

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