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One of the biggest challenges Forex traders face is to understand a running correction. Elliott waves are full of such corrections, but Elliott Waves traders miss the whole point.
The result is that a trading account is overblown because traders are either exiting too early or get in too late. This leads to overtrading and overtrading leads to margin calls.
A running correction is a concept that is easy to understand. The problem is to be able to accept that these corrections form often on the currency market.
The word “running”, or this terminology, refers to a correction that is not ending in the territory of the previous wave. Let me give you an example.
In an impulsive wave, there are two corrections (the 2nd and the 4th waves) and three impulsive waves (the 1st, the 3rd, and the 5th). The whole move 1-2-3-4-5 represents an impulsive wave of a bigger degree.
The general tendency, or the conventional wisdom, is stating that the second wave must end in the territory of the 1st one. It is normal because it is a move that corrects the previous wave.
While this is true, it is not the only possibility that the market has. If the 2nd wave is a running correction, it will end above the end of the previous wave (in a bullish impulsive move) and below the end of the previous wave (in a bearish impulsive move).
The x-wave or the intervening wave in a running correction will always be a large one, usually a zig-zag or a zigzag family pattern. Moreover, the correction will almost always end with a triangle.
The beauty part of a running correction is that it is always followed by an extended wave. According to Elliott, minimum 161.8% extension should follow a running correction.
But the extension should be projected from the end of the running correction, which we just mentioned that it is higher in the case of a bullish impulsive wave or lower in a bearish one.
That is what makes the difference between a correct and incorrect count.
The chart below shows how a running correction looks. The second wave in that impulsive move ends lower than the end of the first wave, which is only normal considering it is bearish.
The idea is to measure the 161.8% extension and compare it with the third wave that followed. But the extension is supposed to be calculated based on the 5th wave’s length, not on the 1st one, as the 5th wave is the biggest motive wave.
Judging by that metric, the 3rd wave is extended as it is longer than 161.8% of the 5th wave’s length. How about the 2nd wave’s structure?
This is labeled as a complex correction with a large x-wave. The length of the -wave is calculated as a retracement level when compared with the first correction of a lower degree.
A proper labeling for the 2nd wave would look like the one in the chart above: a-b-c-x-a-b-c-d-e. This is a flat, followed by a very large x wave, and ends with a triangle.
What is important here is to look at the end of the 1st wave and check where the 2nd wave ends: way lower. This is a running correction and most of the times such a correction is found in 2nd waves right before the extended 3rd wave.
The example above is even more bearish as the triangle at the end of the running correction is falling, which makes the bearish trend more powerful. Another place where running corrections form is the b-wave of a zigzag or the 4th wave of an impulsive move.
However, out of the three possibilities, the 2nd wave of an impulsive move is most likely to form a running correction. The correction above is called a double-three running pattern, but other running corrections can form, like:
As is showed above, not only that running correction are common, but they are of numerous types too. There is nothing like being on the wrong side of a running correction.
The large x-wave is typically mistaken with the 3rd wave in an impulsive move, and the second correction that comes after the x-wave is confused with the 4th wave. When the market ends the consolidation and the trend resumes, traders exit too early on the belief that the 5th wave should end with a new low (in a bearish impulsive move) or a new high (in a bullish impulsive move).
That is a wrong move as traders will miss the extended wave as the running correction just ended. Moreover, many traders get trapped in the opposite direction as they’re looking for a corrective move to follow.
To sum up, while running corrections seem difficult to understand, they are similar with the classical complex corrections, with one big difference: the x-wave is a large one, or a very large one. This makes trends even more powerful when a running correction is involved.