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Elliot Waves Complete Guide | Chapter 3.1 - "Corrective Waves"

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Hello Traders. Welcome to Chapter 3, where we talk about corrective waves. In chapter 3.1, we will be discussing Zig-Zag waves. The zig zag wave is one of the common of patterns in corrective Elliot Waves. Many of us see this on a daily basis, but did you know that there was a meaning behind all of the fluctuations in the price action?

Chapter 3 Glossary:

3.1 Zig-Zag Waves
3.2 Flat Correction , Expanded Flat
3.3 Running Flat, Contracting Flat
3.4 Barrier Triangle, Expanded Triangle
3.5 Double-Three
3.6 Triple-Three

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We have to understand that markets also move against the trend of one greater degree only with struggle due to intraday traders. This is why Elliot Waves is another technique to organize the chaos within the market, as two forces are pulling in each direction regardless of how we want it to move. Let's talk about the MAIN important note for correction waves - they never have five waves. If they do, they are only a motive part of the overall corrective pattern. It's that simple. Corrections can be classified into two different classes of styles. There are the sharp corrections, which move sharply against the major trend. Their angle is rather steep. On the other hand are sideways corrections, they don’t retrace much in price, but can take a long time to finish.

Apart from the two styles are in general three correction pattern:
Zig-Zag (5-3-5)
Flat (3-3-5) (regular, expanded, running)
Triangle (3-3-3-3-3) (contracting, barrier, expanding and running)

Combination of these pattern form either a double three or triple three correction. These prolonged corrections are separated by a wave X. All of these will be discussed in the following chapters.

Zig-Zag Patterns

A single Zig-Zag is a simple three-waved corrective movement which is labelled as an ABC wave. It’s structure is 5-3-5, and the top of wave B is noticeably lower than the start of wave A as shown above. There are rules to this. If you are still not sure of what we are talking about, you need to go back and review chapter 2.

Rules:
• Wave A has to be a motive or diagonal
• Wave B can only be a corrective pattern
• Wave B has to be shorter than Wave A
• Wave C has to be an impulse or ending diagonal along the way

This is the most common corrective pattern in Elliott Wave Theory and is usually a sharp correction within a descending wedge structure. For those not able to see it from an Elliot wave perspective, most traders can identify this pattern as a pennant continuation pattern. But the chaotic movements inside can be organized via Elliot Waves.

The length of wave C is between 100%-161.8% of wave A.

Zig-Zag corrections appear most of the time as a wave 2 only, but are also very common as a connective wave in more complex corrections like a double as shown above! Occasionally Zig-Zag corrections will occur in two, sometimes even three times in a row. This happens usually when the first Zig-Zag does not correct far enough from a price action perspective.

❗If a double Zig-Zag occurs, the single ZigZags are separated by a three-waved reactionary move, which is labelled as Wave X and is always corrective on the way down.

Note: Zig-Zag corrections often fit into a parallel channel! It is drawn between the highs of wave A & B to determine the end of wave C.

Thank you!
Trade Safe.
Comment: Elliot Waves Complete Guide | Chapter 1 - "The Overall Cycle"
Comment: Elliot Waves Complete Guide | Chapter 2.1 - "Motive Waves"
Comment: Elliot Waves Complete Guide | Chapter 2.2 - "Ending Diagonal"
Comment: Elliot Waves Complete Guide | Chapter 2.3 - "Extensions"

Comments

Thanks for sharing this thorough guide! These concepts are not easy and helping others is important. We've added it to Editors' Picks.
200coins
+7 Reply
mlschlaf TradingView
@TradingView, I doubt if I'll change any minds here but Elliot Wave Theory is complete garbage. I studied this extensively years ago, even got a news letter, and any benefits were just luck. Mostly they said the big crash was coming just around the corner as predicted by the 5th and final Elliott Wave pattern. The problem is that you can always find patterns in historical data to fit a theory. This is no different than people looking at a tortilla and seeing the face of Jesus. Most technical analysis that attempts to rely on finding patterns is also unhelpful.

So what is useful? Currently I use simple moving averages on stock market indexes typically the S&P 500, check relative strength of a basket of ETFs and use ETF rotation. This is working well for now that could very well change.

Who am I ? Just regular guy who has had his fill of self proclaimed Financial gurus and experts that promise much and always under deliver. Do your own work take charge of your investments there is no magic formula.
+5 Reply
@mlschlaf, completely agree. I HATE seeing nonsense like this being promoted. I also share a very similar strat. Main confluences are RVOL>2-3, strong trend, reversals etc. Never one on its own, but together this is very consistent. 79% win rate for the last 3 months using this method :L
Reply
mlschlaf Speirsmeister
@Speirsmeister, I'm more of buy and semi hold guy, use the SMAs on the SP500 for Risk on Risk off indicator, its a lagging indicator "No one can predict the future" but it can help verify a big correction. Then the Relative Strength for my basket of Index Equity and Bond ETFs, Seems too be better, I do 64 and 128 day look back. Plus it allows me to switch to cash or bond ETFs if needed.

Its not perfect but I don't spend huge hours or time researching or trading individual stocks. I only trade a few times a year. If I can prevent myself from riding the market all the way down and catch most of the next bull run I'm good with that.
Reply
XForceGlobal Speirsmeister
@Speirsmeister, glad you were able to produce an outcome with such results! Thats fantastic. But this is not promotional, rather, I put lots of effort in this as this is a difficult concept by nature. Thank you and good luck!
Reply
THX1959 Speirsmeister
@Speirsmeister, it always makes me sad when the ignorati mount the soap box make a claim of superior prowess and and spew forth about their propriety application of technical indicators.

Nonsense: "very consistent...79% win rate for the last 3 months"

More accurate: "21% losing trades over the last three months"

21% losers. Unacceptable. And entirely avoidable. No technical spit and chicken feet technical indicator sophistry required.
Reply
@THX1959, I actually don't know what you mean tbh. I'm saying I hate seeing BS like this, I personally just stick to simple methods, the basics, and it works very well for me. No need for the rather strange comment dude.
+1 Reply
@mlschlaf, first of all, very well said and I like how you set your ground! But it doesn’t mean that it’s not useful. Elliot Waves has been around ever since trading has been around and the application of Elliot Waves has been used since its creation. It’s probably considered one of the harder theories to master, but it’s what the nature of it really is - it’s merely a theory. You are right, there is no magic formula! However, with a combination of using the proper techniques, you learn to increase your probabilities as a trader and using those indicators above as you mentioned can be a recipe for incredible success in trading.
Reply
mlschlaf XForceGlobal
@XForceGlobal, My main argument with it is when prediction didn't pan out as expected excuses where made as to why that didn't happen. Repeatedly the 5th and final wave was predicted only to have that pass and new prediction was made.

I would suggest that any system that difficult to master cannot reliably be used even those that profess to be experts. I personally embrace the KISS principle.

If it works for you more power to you. Ride the wave!
Reply
@mlschlaf, No need to argue against it, really. It’s a concept and theory that has been used to predict the overall moves of the larger picture. It is almost dissecting the cell of the human body. Just because it is difficult doesn’t mean it not being used. A self fulling concept, even if difficult, is embraced by the general public, it becomes truer within the market and if the application of it used on an increasingly basis, it means that Elliot Waves will always have a place. The same goes with many algorithms and backtesting results of indicators. Used with the right combination will HELP the trader! :)
Reply
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