The
5-wave trends are then corrected and reversed by 3-wave countertrends. Letters
are used instead of numbers to track the correction. Check out this example of
a smokin' hot corrective 3-wave pattern!
Just
because we've been using a bull market as my primary example doesn't mean the
Elliott Wave Theory doesn't work on bear markets. The same 5-3 wave pattern can
look like this:
Types of Corrective Wave Patterns
According
to Elliott, there are 21 corrective ABC patterns ranging from simple to
complex.
"Uh
21? I can't memorize all of that! The basics of the Elliott Wave Theory are
already mind-blowing!"
Take it
easy, young padawan. The great thing about Elliott Wave is you don't have to be
above the legal drinking age to trade it! You don't have to get a fake ID or
memorize all 21 types of corrective ABC patterns because they are just made up
of three very simple easy-to-understand formations.
Let's take a look at these three formations. The examples below apply to uptrends, but you can just invert them if you're dealing with a downtrend.
The Zig-Zag Formation
Zig-zag
formations are very steep moves in price that goes against the predominant
trend. Wave B is typically shortest in length compared to Waves A and C. These
zig-zag patterns can happen twice or even thrice in a correction (2 to 3
zig-zag patterns linked together). Like with all waves, each of the waves in
zig-zag patterns could be broken up into 5-wave patterns.
The Flat Formation
Flat formations are simple sideways corrective waves. In flats,
the lengths of the waves are GENERALLY equal in
length, with wave B reversing wave A's move and wave C undoing wave B's move.
We say generally because wave B can sometimes go beyond the beginning of wave
A.
The Triangle Formation
Triangle
formations are corrective patterns that are bound by either converging or
diverging trend lines. Triangles are made up of 5-waves that move against the
trend in a sideways fashion. These triangles can be symmetrical, descending,
ascending, or expanding.
Drop by our forums if you want to see the bullish and bearish
versions of these Elliott Wave patterns.
