Basis of Elliot Wave Theory – Corrective Waves
So-called 5-wave trends are possible to be corrected and reversed by opposite triple wave countertrends. Corrections are tracked not by numbers, as in the case of 5-wave trends, but in the form of letters. There is one pretty cool 3-wave pattern presented below. Check it out!
However previous example was presented using bull market, it does not mean the tool of Elliot Wave Theory cannot be used with bear markets. In this case, the 5-3 pattern looks similarly like below:
What are the types of such wave patterns?
Elliot has prepared 21 different corrective patterns. Ones of them are rather simply, however there are also some very complex solutions. It does not mean there is necessity of knowledge each of them. Corrective ABC patterns are made from three simply formations which are not difficult and challenging to understand.
The Zig-Zag Formation
First of them is Zig-Zag Formation. In this formation price steps are very steep and their direction is against the predominant trend. As it is presented in the picture below, middle wave is always shorter than steps before and after that. Such zig-zag formation can occur even twice or trice in one correction. It happens when two or three zig-zag patterns are linked together. However, zig-zag formation is a type of wave pattern so it can be divided into 5-wave patterns.
Although it sounds like the name of some old-school punk band their character is definitely opposite. The flats are sideways corrective waves whose length of each wave is almost the same. However, each wave is in an opposite direction so in the result, each next wave undoes the movement of the previous one.
The last one formation in the triangle formation. This kind of formation is limited with ascending and descending trend lines. The triangles are built of sideways waves which goes in opposite directions. Such triangles can occur in four ways one the chart. They can have symmetric, increasing, decreasing or even expanding character.
Despite, there are over twenty Elliot’s Wave Patterns, there is easy way to understand the majority of them. The easiest way is to learn mentioned formations.