The patterns that usually occur in the market can be subdivided in two main categories: Impulsive pattern and corrective pattern. The main difference between these two groups is in Impulsive pattern the move in the market is sharp and without overlap but in corrective pattern, we see sideway and overlapping price actions. The impulsive patterns are labeled by numbers ( 1,2,3,4,5 or i,ii,iii,iv,v) and corrective patterns by letters (A,B,C or W,X,Y,Z).
The objective of this blog is to show very briefly the more common patterns and how to use labels for them.
The Impulsive Pattern:
An impulsive pattern is a wave pattern seen during the market moves; it is composed of five wave sequences. In this pattern we have three main criteria:
1) Wave 2 cannot go below start of Wave 1.
2) Wave 3 cannot be the shortest between Wave 1, 3 and 5.
3) There is no overlap between Wave 4 and Wave 1.
The Corrective Patterns:
It should be noted that most of the times the market moves in corrective patterns. That is why a trader should know how to label the corrective patterns. The corrective patterns can be categorized as follow:
Zig-zag: (5-3-5):
This pattern composed on three wave sequences. In this pattern we have three main criteria:
1) Wave A and C should be in 5 waves.
2) Each leg should have divergence in the peak
3) Wave B cannot retrace more than 100% of Wave A.
4) Wave C should not extend more than 1.618 related to A-B
Flat: (3-3-5):
This pattern composed on three wave sequences. In this pattern we have three main criteria:
1) Wave A should be a three wave move.
2) Wave B should retrace at least 90% of Wave A.
3) Wave C should be an impulsive pattern.
With regard to point number (2) we can have three different scenarios:
If Wave B does not go beyond start of Wave A: Regular Flat:
If Wave B goes beyond start of Wave A and Wave C breaks the end of Wave A: Expanded Flat :
If Wave B goes beyond start of Wave A and Wace C does not break the end of Wave A: Running Flat:
Triangle: (3-3-3-3-3)
This pattern composed of five contracting wave sequences. In this pattern we have two main criteria:
1) Each wave sequence should be in 3 waves.
2) Each wave should be shorter than the previous wave.
Double Zig-Zag:
This pattern composed of seven wave sequences. In this pattern we have three main criteria:
1) The first three waves should be a zig-zag.
2) The connector can be any corrective pattern ( zig-zag, Flat or Triangle)
3) The last three waves should be also a zig-zag.
Double Correction:
This pattern composed of three wave sequences in which, each wave is composed of any corrective pattern. We can see two examples of double corrections in the following figures:
After explaining the patterns labeling in general, we would like to explain here in more details when to label a corrective pattern in A,B,C and when to label it with W,X,Y. As a general rule, the A,B,C label should be used only at least one of the three legs of the pattern is in five waves. Therefore if the first leg is in five waves, we label the pattern with A,B,C but if the first leg is in three waves then by default we label it as W,X,Y and if the third legs comes in five waves (with a deep retracement in wave B justifying 3-3-5 FLAT) then we adjust the labeling to A,B,C.
In order to make this clearer, consider that we have a bull market and this market is going to correct in three waves. If the first leg is in five as you can see in the figure below we have to use A,B,C but if the first leg is in three waves, we start with W and then if the third leg comes in five waves (with a deep retracement in wave B meeting criteria of a FLAT) then we will adjust the wave W to A and use A,B,C.
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