Elliott Waves Theory – The All-Important B Wave Retracement
Forex traders should be aware that market is spending most of the time in consolidation or ranging, and, when it comes to Elliott Waves theory, this means it is more common for the market to form corrections rather than an impulsive wave. This is how the currency pairs are moving and a Forex trader should adapt. Such consolidations area being caused by various factors. Lack of demand caused by the end of a trading session is a very plausible reason for the market to suddenly lose direction and start ranging. This is happening and can be visible after the end of the London session as activity drops significantly. The same is even more obvious after the North American session ends and the Asian session is about to start. Asian sessions are by definition very slow, and this means corrective waves are forming. Interpreting a corrective wave is a tricky thing, though. The fact that market is forming a corrective wave doesn’t mean that there is any impulsive activity. In reality, a corrective wave can be even more vicious than a single impulsive wave. The classical example, in this case, is a triple zigzag. Such a complex correction, despite the fact that it is indeed a complex correction, it is actually formed out of six different impulsive waves of a lower degree. In other words, such a move will be characterized by market moving aggressively in a specific direction, even though the whole move is corrective. Therefore, trading corrective waves doesn’t necessary mean that the market is not moving. In order to know what kind of a correction the market is forming, it all comes down to the b-wave. This is a crucial wave and its retracement is telling us what possible pattern is going to form.
Golden Ratio Makes the Difference Again
Before going into more details regarding the b-wave of any corrective wave, it is worth mentioning that such a wave is always a corrective one on its own. In other words, it makes no sense to look for an impulsive wave when already an a-wave has been completed. The b-wave is the one that makes the difference between the type of the correction that the market is going to form and based on its retracement, a trader knows the structure of the previous move market made. This is crucial in correctly forecasting future prices and offers a huge competitive advantage when trading with Elliott Waves. After all, this is what trading is: interpreting previous price action in order to forecast future ones.
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B-Waves in Zigzags
By now, you should now that a correction is being always labeled with letters and it is represented like this: a-b-c. This is a three waves structure and can be the A-wave of a bigger degree, for example. Nevertheless, it is a three waves structure as a corrective wave. In this three waves structure, as mentioned above, the b-wave is always a corrective wave. Its structure is very important, but even more important is the retracement level into the territory of the previous a-wave. It all comes down to the 61.8% or the golden ratio. The b-wave in a zigzag should not end anywhere beyond the 61.8% retracement when compared with the previous a-wave. Careful here as this is a tricky statement, like many other in Elliott Waves theory! The retracement refers to the end of the b-wave, not the actual high/low point parts of it might travel. Therefore, assuming we have a five waves structure followed by an a-wave, and then a counter trend move, that counter trend move must be a b-wave. At this moment of time, all eyes should be on how much this counter trend move is going to retrace. If it is retracing less than 61.8%, the market is forming a zigzag pattern for the whole a-b-c. Any zigzag MUST have the 5-3-5 structure for it’s a-b-c, or, an impulsive wave-corrective wave-impulsive wave. This means that if the b-wave retraces less than 61.8% into the territory of the previous a-wave, the a-wave MUST be an impulsive wave (the first five waves structure), and the c-wave to follow MUST be an impulsive wave on its own. This way, we identified the nature of the previous pattern, only for that to give us the nature of the pattern that is about to form: the c wave of a zigzag, that must be an impulsive wave. And all these are being given by the fact that the b-wave is not retracing more than 61.8% of the a-wave. This is just a simple example of the power the Elliott Waves theory has when forecasting future price movements.
B-Waves in Flats
The previous example showed the b-wave being decisive in the structure of a zigzag, but the Elliott Waves logical process should continue. The next question a trader should ask is the following: what if the b-wave is retracing more than 61.8% of the previous a-wave? Such a retracement is totally invalidating the zigzag scenario, only to open a new one: the market is forming a flat pattern. In a flat pattern, it is mandatory for the b-wave to retrace minimum 61.8% of the previous a-wave and the overall a-b-c structure MUST be a 3-3-5 or a corrective wave – corrective wave – impulsive wave. And just like that, the b-wave is telling us again the nature of the previous wave as well as the nature of the wave to follow. This means profits can be made as we know that the previous a-wave MUST be a corrective wave (either a flat or zigzag or a complex correction of a lower degree), and the future c-wave MUST be an impulsive wave. The next thing to do in order to correctly position for trading the c-wave based on the b-wave retracement is to go back and look at the types of the impulsive waves possible to form. A third wave extension is the most popular impulsive wave and just like that, the trader has the most likely scenario for the pattern to form. This can translate by correctly positioning for the next move, and this means making profits from Forex trading. And again, it all has been given by the b-wave retracement level.
B-Waves in Triangles
This part is very easy to explain as there are simply no limitations when it comes to the retracement level the b-wave is allowed to travel in a triangle. Actually, there is one limitation and it calls for the b-wave not to retrace more than 261.8% more than the a-wave. In such a case the pattern that forms is not a triangle, and most likely are the b-wave of a running flat or part of an impulsive wave. No other limitations can be applied for the b-wave in a triangle. These three situations for the b-wave retracement level are the cornerstone of starting labeling corrective waves. It all comes down to the b-wave in order to move forward with the logical process and see if the corrective wave is a simple or a complex one. More about this on the future articles here on our Forex Trading Academy.
Other educational materials
- What Are Corrective Waves?
- Trade Forex with Simple Corrections
- Trading with the Apex of a Contracting Triangle
- Types of Contracting Triangles
- The Concept of a Running Correction
- Double Three Running Patterns
Recommended further readings
- “METHODOLOGY FOR ELLIOTT WAVES PATTERN RECOGNITION.” Kotyrba, Martin, Eva Volna, Michal Janosek, Hashim Habiballa, and David Brazina. ratio 34, no. 55 (2013): 0-618.
- “How to use Fibonacci retracement to predict forex market.” Gaucan, Violeta. Journal of Knowledge Management, Economics and Information Technology 1, no. 2 (2011).