How a tapering triangle work

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The euro/dollar pair has not attracted our attention for a long time. It has been trading in a narrow 6 figure wide corridor since the beginning of 2021. Breakout traders have lost a lot of money trying to find a new trend. Is it worth trying something different?


EUR/USD

EURUSD

Above is a daily chart of the Euro/Dollar pair. It shows a descending tapering channel which turns into a triangle. What does the theory of technical analysis tell us?
– Decreasing volatility leads to a tapering triangle. We can see that indeed the swing amplitude of the Euro/Dollar pair has decreased dramatically
– An exit from the triangle is possible in either direction. But it is more likely that the movement will occur in the direction of the triangle. That is downwards.
– After a breakout of the triangle, volatility is more likely to increase. And it means that traders have a great opportunity to enter with a small stop and high profit potential.
But what awaits us in practice? In practice we should pay attention not only to TA figure, but also to its nuances. It is the nuances that can give an additional advantage when entering the trade.
What are we talking about in this case? As you remember, we made a bold prediction at the beginning of the year. Most analysts were expecting strong moves in one direction or the other for the euro/dollar pair in 2021. We suggested that if everyone is expecting the same thing, then the angry market will do the opposite. Namely, it might trade in a narrow range all year. That is exactly what has been happening for almost 7 months now.
So, if our logic is correct, a breakout of the lower boundary of the triangle could be a big trap for the bears. Technically speaking, they would be right. However, the breakout point would be near or even below the low of the 2021 trading range. And that could be the most powerful factor to push the price up, with the first target of 1.20.
But what if it happens the other way round? We can’t predict the future. But we don’t need to. Observance of the money management allows the trader not to worry about any developments. Therefore, let’s keep an eye on this triangle, the borders of which may be broken through as early as this week.

No market-moving news on Monday


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