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Elliott divided the moves a market is making in two main categories: impulsive and corrective waves. The overall definition is the Elliott Waves theory calls for a five-wave structure (the impulsive move) to be corrected by a three-wave structure (the corrective move).
Therefore, a three-wave structure is always associated with a corrective wave. If impulsive waves have limited possibilities (3rd wave, 1st wave or 5th wave extensions), things are a bit more complex with corrective waves. This is only normal if you consider that markets spend most of the time in ranges, or in consolidation areas. Imagine the Asian session, which is a slow moving, low volatility trading session: corrective waves all over the place.
Because of their complexity, Elliott divided corrective waves into two categories: simple and complex corrections. Out of the two, the most common patterns are the ones in the complex category.
Simple corrections are three-wave structures labeled with letters. As a rule of thumb, any corrective wave is labeled with letters, and not with numbers.
According to Elliott, there are only three types of simple corrective waves a market can form at any one moment: a flat, a zigzag and a triangle.
A flat pattern is a three-wave structure labeled with a-b-c. The key in a flat pattern stays with the b-wave: it must retrace more than 61.8% of the previous a-wave.
If that is not happening, the pattern is not a flat. Moreover, out of the three waves that make up this pattern, the last one, the c-wave, is an impulsive move (therefore it must respect ALL the rules of an impulsive move), while the other two are corrective in nature.
A zigzag is still a corrective wave, a three-wave structure on its own, and labeled with letters as well: a-b-c. Again, here too, the key stays with the b-wave.
Only this time it is mandatory for the b-wave to retrace LESS than 61.8% of the previous wave a. Moreover, in a zigzag, both waves a and c are impulsive (therefore, must adhere to all the rules of an impulsive move), while only the b-wave is corrective in nature.
As a tip or general rule, in any correction under the Elliott Waves rules, a b-wave is corrective in nature. No matter the structure, its lower degree count must be corrective (labeled with letters).
A triangle is the most common way or the favorite way for a market to consolidate. Chances are, that whenever you’re looking at a market, it is part of a triangle of a bigger degree.
Triangles are complicated patterns to understand and, starting with their definition, things are ambiguous: they are three-wave structures, but they have five segments. The explanation comes from the fact that ALL five segments of a triangle are corrective in nature, and, therefore, the whole pattern is corrective (or a three-wave structure).
Like any corrective wave, a triangle is labeled with letters: a-b-c-d-e. As a rule of thumb, the only possibility to use the letters d and e when counting waves under the Elliott principle is to label legs of triangles.
Triangles are of multiple types: contracting or expanding, limiting or non-limiting, with different base lines, etc. Their complexity is being given both by their types as well as by their interpretation.
Nevertheless, they are wonderful in predicting future price patterns. This makes them priceless when trading with Elliott.
At the start of this article, it was mentioned that complex corrections are more common that simple ones. That is, a simple correction MUST be confirmed by future price action.
Confirmation is a different subject, but it calls for future prices to make specific moves after the pattern is completed. Each simple corrective wave implies different price action to follow.
If the price action confirms the simple correction, counting can continue with a wave of a bigger degree. If not, chances are that the market is forming a complex correction.
A complex correction is one that involves minimum two simple corrections (flats, zigzags or triangles) that are connected by an intervening wave. To complicate things even further, this connecting wave, called the x-wave, is a corrective wave on its own (a flat, a zigzag, a triangle, or a complex correction on its own).
As a rule, any complex correction cannot have more than two x-waves. This limits the number of simple corrections part of a complex one to three.
Combining the three simple corrections listed in this article (flats, zigzags, and triangles) and connecting them with maximum two x-waves, results in complex corrections. Such a correction cannot start with a triangle, and examples of complex corrections are:
The complex corrections listed above are only a few as the idea was to show the resulted patterns when combining the simple corrections described by Elliott. The list can continue with triple combinations, triple zigzags, running corrections, etc.
Every complex correction has its own rules and interpretation, starting with the conditions needed for a move to be considered a complex one and ending with the places where they are possible to form. Below, there is a triple combination represented, with the zigzag being the first corrective wave, followed by an intervening x-wave, then a flat, another x-wave, and ends with a triangle.
Knowing the rules of simple corrective waves will help you understand complex ones as only the x-wave is different. Perhaps it is clear now why traders are starting to count waves with the Elliott theory thinking it is an easy way to find the perfect trade, and, when going in more details, things are getting complicated.
Because of this, it can be said that the Elliott Waves theory is misleading. Traders are fooled by the simple “five-waves structure corrected with a three-waves one” statement most of the times.
While the statement is correct, going in details and checking all those waves is something that requires a lot of time and experience. But, for passionate traders, this a small price to pay.