Hello there, this is tradingpedia.com and this video deals with the Elliott Waves Theory. We continue with the Elliott Theory – we already introduced the notions of impulsive and corrective waves and of labeling impulsive waves with numbers and corrective waves with letters. At this point we move forward with simple corrective waves with the Elliott Waves Theory. Here we lay down the principles and we look at some examples on the market.
This is the EURUSD at 1.1908 on the first day of September, rejected at the 1.20 level. I will use this part of the chart for the theoretical part.
Elliott Waves Theory – Principles and Examples
Elliott identified only three simple corrective waves. These are – flat patterns, zigzag patterns, and triangles or triangular patterns. These is everything you need to know about corrective waves with the Elliott Waves Theory.
From these three patterns the theory evolves into more patterns, but if you understand these patterns when it comes to corrective waves, then you are on the right side of the market. Being corrective waves, they are labeled with letters, and not numbers.
These are three’s, or a-b-c. A flat and a zigzag are labeled a-b-c and a triangle is labeled a-b-c-d-e, although it has five segments. So, how come a triangle is called a “three”, when it has five segments? The answer is that all the segments are corrective.
The difference between the three patterns comes from the internal structure of each wave. For instance, for a flat pattern, let’s assume we have a bullish trend and then the market forms an a-b-c. A flat. The key is that the b-wave retraces more than 61.8% into the territory of the previous wave a. Moreover, waves a and b are corrective, while only wave c is impulsive. This is a flat and there are various types of flats and we will cover them here later in this academy.
A zigzag pattern, if we assume a bullish trend, the market forms an a-b-c. The difference is that wave a is impulsive, wave b is corrective, and it is not strong enough – it fails to retrace more than 61.8% of wave a. So, if you are expecting a corrective pattern and the b-wave fails to retrace more than 61.8% of wave a, you know you will expect either a flat or a triangle. And then if you see that the c-wave is impulsive, this is not a flat, and most likely will be a triangle.
In a zigzag both waves a and c are impulsive and only wave b is corrective. In a flat, wave a is corrective, wave b is corrective, and only wave c is impulsive. This is called a zigzag. They are not so common like flats – there are ten types of flats but only three types of zigzags.
The last simple correction is called a triangle. Imagine that the market forms five segments after a bullish trend – a-b-c-d-e. All segments are corrective – wave a, for instance, may be a zigzag, a flat, or a complex correction. All of them are corrective, and none is impulsive. You may still have impulsive activity, but it is either a terminal impulsive move or only part of a leg of a triangle.
Why is it called a triangle? If you connect the b-d and the a-c trendlines, they will contract or expand, looking like a triangular pattern. Triangles form everywhere, they are more common than flats.
These are all the simple corrections the Elliott Waves Theory covers. You might say that there are other patterns you may be familiar with from the Elliott Waves Theory. You are correct, but they all derive from simple corrective waves.
When we will introduce the notion of the x-wave, you will understand how that goes. Before that, look at the EURUSD how it formed higher lows and lower highs, basically the price action contracted. If it contracted, we could imagine a triangle a-b-c-d-e, a triangle as a reversal pattern. We will not discuss here the rules of a triangle, what is needed for the b-d trendline or the a-c one – we will do this on a different occasion.
This is what a triangle looks like in reality, with the Elliott Waves Theory, and the same we can say about zigzags and flats. Thank you for being here, bye bye.