How to Trade Double and Triple ZigZags
Elliott Waves theory is based on in impulsive wave, or a five-wave structure that is corrected by a three-wave one. That impulsive wave is far more aggressive than the corrective one, in the sense that the price travels more in the case of an impulsive wave than in a corrective wave. This holds true for most of the patterns, with some exceptions: a double or a triple zigzag. These two patterns are the most vicious ones when it comes to the price travelling in one direction or another. They are so violent that they leave traders little or no room to exit if they are on the wrong side of the market. Such patterns are so aggressive because the double zigzag is formed out of four impulsive waves, while a triple one is formed from no less than six different impulsive waves. All the rules of an impulsive wave are to be found in these types of impulsive waves, while retracement is almost non-existent.
How to Trade Such Patterns
It is one thing to know the nature of a pattern, and a totally different thing to know how to trade it. There are different situations where these patterns appear as well, and this should be the starting point to any double or triple zigzag interpretation. The first thing to consider is that being such powerful patterns, it is not possible for them to be completely retraced by a wave of the same degree. This says much about the nature of the move to follow a double or a triple zigzag. The next thing to look for is the place where they might appear. The most common place is a leg or a segment of a triangle, but also the first or the third segment in a so-called terminal pattern that resembles a wedge formation.
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Trading a Double Zigzag
By definition, a double zigzag is formed out of, well, two zigzags. We know by now that a zigzag is a simple correction that is labelled with letters, a–b–c, and that the a and c waves are impulsive waves. A double zigzag, therefore, will have four different impulsive waves in the same direction, which are connected by small corrections. These small corrections are the first b-wave in the first zigzag, the x-wave, and the second b-wave in the second zigzag. Trading a double zigzag has everything to do with its channelling componence, and with the retracement level of the b-wave. Such a pattern channels extremely well, and the channel should start from the end of the first b-wave. Therefore, all we have to do is to wait for the first five-wave structure to unfold, and then look for a bounce by the time it is completed. This bounce is the b-wave, and it is mandatory for it not to retrace more than 61.8% of the previous five-wave structure. As a matter of fact, this gives us the entry in a trade that involves a double zigzag, in the sense that the 23.6% or 38.2% retracement levels will be the ones to use for entering a trade. Keep in mind that in violent zigzag patterns the 38.2% level is rarely reached, so make sure the 23.6% one is used all the time. The take profit, in this case, should be at a minimum the distance of the first impulsive wave, projected from the end of the b-wave. Speaking of the end of the b-wave and coming back to the channelling component, a channel can be drawn from the end of the b-wave to the end of the second impulsive wave. The whole pattern should follow this channel, and now it is very simple to trade it: Just buy the lower part of the channel in a bearish double zigzag, and sell the upper part. The opposite applies in the case of a bullish pattern.
Trading a Triple Zigzag
A triple zigzag should be traded keeping in mind all the things discussed above, as they are all valid in this instance as well. A trader doesn’t know whether the market is going to form a double or a triple zigzag, so all eyes should stay on the channelling aspect described above. What we do know for sure is that both a double and a triple zigzag are considered completed by the time price is not channelling anymore. This should be the very first rule to obey when trading a triple zigzag. The next thing is to keep in mind that the last two impulsive waves are vicious, and you’ll have the impression that the market is not going to stop falling or rising. All stops will be triggered, and margin calls will be received by reckless traders. All in all, the last two impulsive waves are difficult to trade. Being the last part of the overall triple zigzag, they should be followed by a strong move in the opposite direction as well, which makes trading the last two impulsive waves, or the last zigzag, a risky thing, and it is recommended that it be avoided. Moreover, in a triple zigzag, you should look for the last zigzag to be the smallest one of the three zigzags. This is just another incentive to ignore it and, as a matter of fact, this should be a great place to start establishing trades in the opposite direction.
An aggressive trader will always try to pick a trade in the opposite direction of a triple zigzag by the time the last zigzag in the pattern is about to start. To do that, the thing to do is to measure the lengths of the previous two zigzags in the pattern, and project the length of the longest one from the end of the second x-wave. With this wave we have an educated notion about the maximum distance of the last zigzag in the pattern, and a trade in the opposite direction can be taken by the time half of that distance is covered, with a stop loss just beyond the end of the projected move for the last zigzag. As a target, look for the whole channel being broken, and then trail the stop loss order. Keep in mind the timeframe the triple zigzag appears on for setting the proper trail stop distance. Conservative traders will wait for the channel to be broken before taking a trade in the opposite direction, but in this case, the reward is not as big as it was in the previous one. No matter how you decide to trade a triple zigzag, expect the pattern to be a vicious one. This makes trading the triple zigzag a risky thing to do.
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Recommended further readings
- “A state space forecasting approach to commodity futures trading.” Marshall, Richard Carel. (1991).
- “A Survey of the Managed Futures Industry.” Jaffarian, Ernest. Efficient Capital Management, Naperville (2007).