The Impact of Running Corrections on the Forex Market
One of the most intriguing concepts introduced by Elliott for the first time to the field of technical analysis is that of a running correction. The overall idea is so strange that even these days there are traders who completely ignore it on the basis that it is not possible for the market to form such a thing. This is so wrong! Not only are running corrections a reality, but they are really common, especially on the Forex market. This market is characterised by fast moves as it reacts most rapidly to various news events, so it is no wonder corrections end the way they do. By definition, a running correction ends beyond the end of the previous wave. This is the overall idea of a running correction; yet few traders fully grasp its significance. The problem comes from the fact that a correction is just that, a correction, and that means it should retrace, or correct, a previous wave. This is correct to a certain extent, as it is not mandatory for it to end in the territory of the previous wave. Parts of it move into the territory of the previous wave, but it is possible for the overall correction to end beyond the end of the previous wave. If I were to put it percentage-wise, I would say that running corrections form about 30%–40% of the time, while classical corrections happen the rest of the time. Running corrections are therefore not that rare, and on top of that, they have one more important characteristic: They are always followed by an explosive move the market makes after the running correction is completed. In other words, you don’t want to miss a running correction, as if it happens to be on the wrong side of the market, the stop loss is most likely to be triggered.
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Types of Running Corrections
Running corrections have some variations, and they can be simple or complex ones. As a matter of fact, there are only two types of simple running correction, and the rest of them are all complex. The ones that are complex are obviously have a large x-wave. For further tips about how to trade a correction with a large x-wave, please refer to the article dedicated to the subject here on our Forex Trading Academy.
Simple Running Corrections
There are two patterns that fall into this category, one of which we have already covered in previous articles: running triangles and running flats. Both of them are followed by an aggressive move in the direction of the previous trend. A running triangle is a simple correction, and the basic rule is that the e-wave ends beyond the start of the a-wave. It usually appears as the fourth wave in an impulsive wave, or the b-wave of a zigzag. A running flat pattern, on the other hand, is a more powerful pattern. First of all, it is a simple correction, and second, it needs to be confirmed by future price action. A running flat is characterised by a super-long b-wave that goes way beyond the 161.8% level when compared with the previous a-wave. One thing to consider here is that the bigger the b-wave is, the more similar the a and the c-waves are.
Complex Running Corrections
A complex running correction involves at least one large x-wave, and the more complex it is, the more powerful the move to follow is. Elliott discovered the following running complex corrections:
- Double three running – As the name suggests, we’re talking about two corrective waves connected by a large x-wave, which is the most common form of a running correction. It appears mostly as the second wave in an impulsive wave of a bigger degree.
- Triple three running – In this case, there are no less than three corrective waves connected by two large x-waves, and this pattern can go really nasty. It almost always ends with a triangle.
- Double and triple running flats – This running correction is made up of two or three running flats (like the ones mentioned in the “simple running corrections” paragraph) and the x-waves here have the tendency to be even more aggressive than the b-waves in those flats. The move that follows such a pattern is one of the most aggressive ones that can be expected.
Trading a running correction is fairly simple in the sense that one should keep in mind where these patterns are most likely to form. Having said that, and assuming the count you’re in calls for a first wave to be completed for you now to be in the second wave of a possible impulsive move, all eyes should be on the x-wave retracement. If this one goes beyond the 61.8% retracement of the first correction, and price is moving even beyond the end of the first wave, chances are that the market is going to form a running correction for the second wave of this overall five-wave structure. One thing to consider is that, at least in the case of a double- or triple-three running pattern, a triangle is most likely to be expected at the end of the pattern. The triangle, on the other hand, can be either a contracting or an expanding one, but chance favours greatly that it is going to be a contracting one. Therefore, if you ever experience a running correction as the second wave in an impulsive move, or the b-wave in a zigzag, just wait until a triangle forms and then try to correctly interpret the triangle. (For this, please refer to the articles dedicated to contracting triangles here on our Forex Trading Academy.) By the time the b–d trendline of that triangle is broken, it means that the second wave in the impulsive move is completed as well. That is the moment from where the third wave, or the impulsive wave that needs to be extended, starts, and this is why an explosion in price and overall market activity should be expected. Future articles will discuss the running concept of these complex corrections in more detail, as they are really important to the overall Elliott Waves theory. It is not possible to have a proper Elliott Waves count if running corrections are not part of it.
Other educational materials
- The All-Important B Wave Retracement
- What Are Corrective Waves?
- Trade Forex with Simple Corrections
- Complex Corrections in Elliott Waves Theory
- Types of Flat Patterns
- Types of Zigzag Patterns
Recommended further readings
- Regression neural network for error correction in foreign exchange forecasting and trading. Chen, A.S. and Leung, M.T., 2004. Computers & Operations Research, 31(7), pp.1049-1068.
- “Short-and long-term links among European and US stock markets.” Gerrits, Robert-Jan, and Ayse Yuce. Applied Financial Economics 9, no. 1 (1999): 1-9.