In Elliott Wave Theory, a contracting diagonal is a five-wave pattern that takes the shape of a triangle. It is a specific form of a diagonal pattern, which is a type of corrective wave in which the price action forms a wedge-shaped pattern.
A contracting diagonal is characterized by progressively decreasing price swings, with each subsequent wave having a shorter distance than the previous one. The pattern is composed of five waves, labeled a-b-c-d-e, and it can appear in either an uptrend or a downtrend.
In a contracting diagonal, wave a and wave b form the first and second legs of the triangle, respectively, and they are followed by a sharp retracement in wave c. Wave d and wave e form the final two legs of the triangle, with wave e typically having the shortest distance of all five waves.
When a contracting diagonal appears on a price chart, it is often a sign of market indecision, and it may signal a potential trend reversal. Traders who use Elliott Wave Theory may use the presence of a contracting diagonal to anticipate future price movements and adjust their trading strategies accordingly.
There are two types of contracting diagonals:
Status:: #wiki/notes/mature
Plantations:: Elliott Wave Theory
References:: The Elliott Wave Principle