Complex Corrections with Elliott Waves Theory
The previous article on our Forex Trading Academy dealt with simple corrections and how to actually trade them based on the b-wave retracement level and the break of the b-d trend line. However, simple corrections appear really rare as individual corrections of a bigger degree, so traders should be ready to deal with complex corrections. A complex correction is formed out of simple ones (zigzags, flats, triangles) that are connected by maximum two x-waves, or intervening x-waves. The key to correctly label a complex correction comes from this connecting x-wave and its retracement level.
Types of Complex Corrections
There are many types of complex corrections Elliott identified and the way to start is to split them into two categories. These categories are being given by how much the first x-wave in a complex correction is retracing into the territory of the previous correction. It means that one should effectively measure the first a-b-c structure, from its beginning until its end, and then look where the end of the x-wave falls. If it x-wave ends above the 61.8% level of the whole first correction, it is being said that the complex correction to form is one with a large x-wave. On the other hand, an x-wave that ends below the 61.8% retracement level is part of a complex correction with a small x-wave. As a rule of thumb, there is not possible for a complex correction to start with a triangle, so the only two options available are a zigzag or a flat pattern.
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Complex Corrections with a Small X-Wave
The patterns that fall into this category are having an x-wave that is retracing less than 61.8% of the previous a-b-c structure (that can either be a zigzag or a flat). Such patterns are by far more common than corrections with large x-waves and therefore it is mandatory for a trader to master them.
Like the name suggests, a double combination is, in fact, a “combination” of two simple corrective waves, connected by a small x-wave. Considering the fact that a complex correction cannot start with a triangle, the only possibilities we have are the following:
- Zig-zag – x wave – triangle. This is a double combination that ends with a triangle, a very common one, and by the time the triangle is completed, the whole pattern is considered to be completed. It has the following structure, of a lower degree: a-b-c – x wave – a-b-c-d-e. All the rules of a zigzag and of a triangle must be respected.
- Flat – x wave – triangle. Still, a double combination that ends with a triangle, a very common one as well, with the following structure: a-b-c – x wave – a-b-c-d-e. The only difference between this double combination and the previous one comes from the fact that the first a-wave is a corrective wave and the first b-wave retraces more than 61.8% of the a-wave.
- Zigzag – x wave – flat. This is a rare double combination and has an a-b-c – x-wave – a-b-c structure.
- Flat – x wave – zigzag. The last possibility of a double combination, still a rare one, with the same structure as the one above.
A double combination almost always is ending with a triangle, so the other ones should be interpreted as being quite rare. Quite rare doesn’t mean they are never forming, as on the Forex market there are to be found on a regular basis.
By now it should be obvious that a triple combination should have just another correction to follow after the double combination is completed. However, this should not come before another x-wave, an intervening one, is forming. There are multiple types of triple combinations and I’m not going to list them all here. All you have to do is to start with either a flat or a zigzag and then to combine the simple corrections in order to find out all the possibilities. You should consider though as, like it was the case with double combinations, a triple combination is almost always ending with a triangle. A typical triple combination is looking like the image below.
Double and Triple Zigzags
Like the name suggests, if there are two zigzags connected by a small x-wave, it is being said that the market forms a double zigzag. Moreover, a triple zigzag has two x-waves and three zigzags, and they represent the most powerful corrective wave market can form. Double and triple zigzags are resembling impulsive activity as traders are often interpreting them on the wrong way. The fact that there is no alternation between corrective waves should be enough in telling us that the actual move is corrective and not impulsive.
Double and Triple Flats
These patterns are rare ones but they do form on the Forex market. We’re talking about two or three flat patterns connected by one or two small x-waves, and a typical representation looks like the one below.
Complex Corrections with a Large X-Wave
Such corrections are the ones that have the X-wave retracing more than 61.8% of the first a-b-c and they are quite tricky. Elliott identified two sub-categories here: running corrections and normal ones.
The most common corrections with a large x-wave are the running ones. The word running by itself implies that the correction will end above the end of the previous impulsive wave (in the case of a bullish trend) or below it (in the case of a bearish trend). Such corrections appear most likely as the 2nd wave in an impulsive wave or as a b-wave in a zigzag. A classical representation for a running correction as the 2nd wave in an impulsive wave can be seen below.
While the x-wave is a large one, in the sense that it is retracing more than 61.8% of the first a-b-c, the end of the whole correction will be into the territory of the 1st wave (if he correction is the 2nd wave in an impulsive wave) or the a-wave (in the case the correction is the b-wave of a zigzag). It is possible that such corrections to form as 4th waves in an impulsive wave, although such a situation should be considered rare. The reason for that comes from the fact that after corrections with large x-waves, the market usually explodes in the opposite direction and this means that either an extended 3rd wave in an impulsive wave or a large c-wave in a zigzag will follow.
This article only shows the possibilities for complex corrections and in order to correctly use and trade them, a further analysis should follow. Such an analysis should consider each and every pattern listed here in order to go further into more details how to properly trade it and interpret it.
Other educational materials
- Types of Zigzag Patterns
- Contracting and Expanding Triangles
- How to Use the Apex of an Expanding Triangle
- Trading with the Apex of a Contracting Triangle
- Types of Contracting Triangles
- Special Types of Triangles
Recommended further readings
- Large financial crashes. Sornette, D., & Johansen, A. (1997). Physica A: Statistical Mechanics and its Applications, 245(3), 411-422.
- Time Series Representation for Elliott Wave Identification in Stock Market Analysis. Phetking, C., Sap, M. N. M., & Selamat, A. (2008).