Contracting triangles are one of the most common and important consolidation patterns that can be found when trading forex. Foreign exchange market and as a matter of fact financial markets in general are spending more than sixty percent of the time consolidating, and contracting triangles are usually the consolidation pattern. So can they be used as a trading tool for the foreign exchange markets? Well, I think they can and below is my reasoning.
First, with foreign exchange being a round the clock market, not all trading sessions are the same in terms of volatility, or how fast markets are moving. London being the center of the financial world nowadays, so the London trading session is usually the most volatile one, with New York and Asian sessions, in this order, to follow.
When volatility is high this means no consolidation conditions are there as price has the tendency to travel, so if you are to see price consolidating in a contracting triangle, then there is more likely to be this pattern during the North American and Asian sessions.
Second, contracting triangles should be classified in two categories: continuation patterns and reversal patterns. If price is in an uptrend, starts to consolidate in a contracting triangle and then breaks higher (in the same direction it entered the pattern initially), then this should be considered a continuation pattern.
In this case there is a measured move to be considered as a target to the upside, and this measured move should be equal with the length of the longest leg of the contracting triangle (which is the first leg, or wave a as it is being also called) projected to the moment when the upper trend line of the triangle is broken. The same principle is valid to the downside, when price is in a downtrend.
As a reversal pattern, a contracting triangle is always found at the end of a complex correction, also called double or triple corrections, and in these cases price has the tendency to break in the opposite direction than it entered initially.
In conclusion, can they be used as a forex trading tool? Definitely, as they can be extremely powerful in pointing future price action.