THE ELLIOTT WAVES THEORY (PART 3) - CORRECTIVE WAVES EXPLAINED

A corrective wave is a three-wave structure. To represent it on a chart, Elliott used letters, not numbers. Therefore, from this moment on, whenever you see an Elliott Wave analysis, you’ll know that letters show corrective activity, while numbers show impulsive one. Right?

Wrong! For, Elliott stated that even in an impulsive wave, there are two corrections. Also, even in corrective waves, there is some impulsive activity of a lower degree.

Simple or Complex Corrections

As mentioned in the previous articles dedicated to this series, the Elliott Waves Theory is a logical process. And, the first question to answer is if a move is impulsive or corrective.

If you reach the conclusion it is impulsive, the next step is to establish what kind of impulsive move the market formed. However, if it is corrective, the next step would be to decide if it is either simple or complex.

For simple corrections, Elliott identified three patterns:

• Zigzags
• Flats
• Triangles

Despite corrections being three-wave structures, they don’t have only three segments. Or, at least, not all of them.

Zigzags

A zigzag is a three-wave structure, a corrective wave. It is labeled with letters: a-b-c. The key to a zigzag pattern is the b-wave. It can’t retrace more than 61.8% into the wave a’s territory. Moreover, waves a and c have an impulsive structure. As such, a zigzag may be a corrective wave (a-b-c), but, of a lower degree, it has two impulsive waves.

Because of that, waves a and c must respect all the rules of an impulsive wave listed under the previous article.

Elliott found three types of zigzags, with the normal zigzag being the most common. In fact, if we were to use some percentages, a normal zigzag appears in more than eighty percent of the cases. And, for the market to form a normal zigzag, the c-wave should measure anywhere between 61.8% and 161.8% when compared with the length of the a-wave.

Flats

Things are a bit more complicated with flats. They’re still three-wave structure, still labeled with a-b-c. However, only the c-wave here is impulsive. Hence, it must respect all the rules of an impulsive wave.

Exactly like in a zigzag, the key to a flat is the b-wave’s retracement level. It is mandatory for it to end beyond the 61.8% when compared to the length of the a-wave. This complicates things a bit because there are no less than ten different types of flats. And, all have a correction for the a-wave, and an impulsive wave for the c-wave.

Triangles

A triangle is a favorite way for market consolidation. Chances are that if you expect a consolidation, no matter the time frame, the market will form a triangle. Any triangle is a corrective wave that has five segments. It is still called a three-wave structure.

The reason for that is because all its segments/legs are corrective in nature. Judging by the above, a triangle’s labeling is a-b-c-d-e. As a rule of thumb, whenever you see the letters d and e in an Elliott Wave count, you should know the author wanted to represent a triangle.

There are various types of triangles Elliott discovered. Starting with the basic split between contracting and expanding ones, and moving to limiting and non-limiting ones, triangles appear everywhere. For the binary options trader, knowing how to trade a triangle is key. It has to do with the b-d trend line and considers its retesting.

While the video dedicated to this part doesn’t feature a triangle, it does consider a flat pattern. Moving forward, we’ll have a look at two examples, one for the AUDUSD pair and one for the USDCHF. Both use the basics of the Elliott Waves Theory to figure out how to trade binary options.