# How to Trade Diagonal Triangles

### Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course and the second module, Elliott Wave Patterns. In this lesson, I’m going to teach you how to trade the diagonal triangles, or any triangles that we just learned about on the previous lesson. Now to do this, we’re going to jump right into the MT4 platform and we’re going to look at a 1, 2, 3, 4, 5 pattern, and any diagonal at the end of wave 5.

Now, the first thing we’re going to look at is we’re going to look at the pattern. This is the pattern. We have the first wave here, and the first retracement which is wave 2, then the third wave which is an elongated wave, and the fourth wave, which is the retracement from this move up, and then we have the fifth wave from this low to this high. As you can see, wave 3 is not the shortest wave. Wave 4 doesn’t come below wave 1, or doesn’t retrace below the highs of wave 1, and wave 2 did not retrace more than 100% of wave 1. This is truly a valid 1, 2, 3, 4, 5 pattern.

Now, what we’re going to do now is we’re going to try to find out where this ending diagonal really is. To do so, we’re just going to draw a line from this high to this high, and from this low to this low. As you can see, we have a wedge formation going on at the end of wave 5, on what it seems to be fader at the end, but you can see that wave 5 inside of the wedge is actually going to be the peak of wave 5 of the 1, 2, 3, 4, 5 pattern. Now, what we’re going to do is we’re going to name the different subwaves that we have inside of the pattern. This is wave 1. Here we have wave 2. Let me just name it here. Right here we have wave 3. Then we have wave 4 inside of the ending diagonal. Let me just rename it 4, and then we have wave 5 right here.

Now, I’m going to show you something that is truly…well, something that you have to be very careful, once you learn how to spot these ending diagonals and learn how to trade them. Now this is the actual design. The actual pattern. One, two, three, four, five. This is the spot where we are going to be trying, and where we are going to be shorting this mark. Now you can see that we have a spike high right here. After we touch for a third time, this descending resistance, which is the descending resistance of these wedge formation at the end of wave 5, which is the subwave 5 inside of the ending diagonal pattern, we have a spike high. This is what we call a stop hunt. Now, the reason this is a stop hunt is because this is a very known pattern.

There’s a lot of traders that understand the Elliott Wave Theory, and that trade with the Elliott Wave Theory and they understand that we are at the end of wave 5, and they are waiting for this, the third touch, and this descending diagonal, or this descending resistance, which is the fifth wave inside of the ending diagonal to get short. Now, some traders are going to put their stops on a very, very low level, which means that they are going to put their stops right here. And, what happens? They’re going to get stopped out. This is too tight of a stop even for a 1-hour chart, because actually if price comes all the way up here to this, lets color it red, to make difference between our stop-losses and the actual pattern.

Even if price comes all the way up here to this red line, it doesn’t mean that this pattern is invalid or that our short position is invalid. In fact, if we go above the first wave or the high of the first wave on this design, we should get out immediately. So we are going to put our stops all the way up here above, well, maybe 15 pips above the highs of wave A, which means that we are going to be risking about 30 pips or 33 pips on this trade.

Now, this is our short position, and this is not normal triangle trade or a normal wedge trade, because we are trading with the Elliott Wave Theory, and we already know that this is the fifth wave inside the ending diagonal pattern, and we are going to flush this market. Now, the other thing we are going to do is we’re going to calculate our targets, of course. We have an 85 pip between wave 1 and wave 2, so we are going to calculate 85 pips all the way down. So 85 pips is around this area, or this congested area of resistance, which now will be support. We are going to be risking about 33 pips to make 120 pips, which is a 1:4 on a risk to reward ratio basis.

Now, this is how you’re going to be trading this design. Of course, if you like to take profits on half of your position, and then letting the rest of it run, you can do so by taking half of your position right here on the calculated target and then grabbing Fibonacci retracement tool from the low of the 1, 2, 3, 4, 5 pattern to the high of the 1, 2, 3, 4, 5 pattern, and taking the rest right here at the 50. If you look closely, the 50 is actually a very strong area of previous resistance because you can see that right here, we moved all the way up here in a very strong move for about 160 pips and then we found a lot of sellers right here at this level. This will be a very good level to take profits or to close your entire position.

This will mean that you would have made about 120 pips on your first half of your position, and then 183 pips on the rest. This is how you’re going to be trading the ending diagonal when you find it at the end of wave 5 on a 1, 2, 3, 4, 5 pattern. Remember that previously we have learned how to trade wave 5, and of course, wave B. Now, this is a very, very good set up to trade wave A of the A, B, C pattern.

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