Elliott Waves – Where to Find Running Corrections
A running correction is a powerful structure that forms before market breaks heavily in a new direction. So powerful running corrections are, that people will have a tough time recognizing them when they are forming. Having said that, it means that they are to be interpreted after the fact if they are being seen only after their formation. This is not a problem for the Elliott Waves trader as even after the fact, they still provide nice opportunities for taking a trade. There are multiple running corrections that the market can form, and we covered so far the most common ones, the double and triple three running. However, there are a few others, like double and triple running flat, running triangle, etc., but their interpretation should be the same. For the overall interpretation of a count, the nature of a running correction is very important. Actually, it is as important as the place where it forms.
Places Where Running Corrections Appear
There are three possibilities where a running correction may form, and they are all taking into account the fact that a powerful move should come in the direction of the previous wave that formed prior to the running correction. Keep in mind that an impulsive wave needs to have at least one extended wave, and extensions are coming most of the times after a running correction ends. As a rule of thumb, a running correction always forms after a five-waves structure. This means that the move that formed before the running correction must be an impulsive wave. Based on the nature of that impulsive wave and its structure, there are three places to consider where running corrections may form.
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2nd Wave in an Impulsive Move
We know by now that an impulsive move is a five-waves structure labeled with numbers, and, out of those five waves, the 2nd and the 4th ones are corrective. In any five-waves structure, one wave needs to be extended, and most of the times the extension is to be found in the 3rd wave. That being said, it means that the logical place to look for a running correction is in the 2nd wave. This is by far the most common place where such corrections appear. A very common mistake traders make when looking for the possible end of the second wave is to expect it to end around 50%-61.8% retracement into the territory of the 1st wave. This is a general belief and there are many traders that are basing their whole analysis on hunting for the third wave to come. In reality, if the 2nd wave is retracing more than 50% and goes as much as 61.8% into the territory of the previous 1st wave, it is unlikely for that move to be the end of the 2nd wave. Such a move is actually only part of the 2nd wave and that part will be only the first corrective phase of a running correction.
The B-Wave of a Zigzag
Another possibility that a trader should take into account for a place where a running correction may appear is the b-wave of a zigzag. As mentioned earlier, a running correction is forming after an impulsive wave, and in this case, the a-wave of a zigzag respects this rule. Waves a and c of a zigzag are always impulsive waves, while only the b-wave is a corrective one. This b-wave may be a running correction. In order to be such a correction, the b-wave will end above (in a bullish zigzag) or below (in a bearish zigzag) the end of the previous impulsive wave. The implications of such a thing are that the c-wave is actually going to be bigger than 161.8% when compared with the length of the previous a-wave. To find out the minimum distance the c-wave should travel after the running correction is completed, one needs to use the Fibonacci retracement tool and measure the length of the a-wave, in order to find out the 161.8% extension. That measured move should be then applied from the end of the b-wave, and in this way, the possible end of the c-wave is found.
The 4th Wave in an Impulsive Move
The last possibility for a running correction to appear is the 4th wave in an impulsive move. In this case, the previous third wave is the five-wave structure that needs to form prior to the running correction. In order for the 4th wave to be a running correction, it means that the 5th wave will be the one that is going to be extended. This makes the overall five-waves structure an impulsive wave with a fifth wave extension. Such patterns are really rare though and because of that it means a running correction as the 4th wave in an impulsive move is rare as well. However, we should take it into consideration as a possibility. Out of all the running corrections possible to form, in the case, the 4th wave is a running triangle, the price action to follow after the triangle breaks higher should be limited in both price and time. We covered this topic earlier in one of our articles here on the Forex Trading Academy. These three possibilities are places where running corrections appear in the Elliott Waves theory and they should limit the possibilities a trader has when counting. This means that one cannot label a running correction as the a-wave of any move, or some other wave, as it simply means the count is wrong. Understanding that running corrections are really common on the Forex market is a step forward in the analytical process of counting waves with the Elliott theory. When doing a top/down analysis of any currency pair, running corrections are to be identified on each and every time frame. A proper top/down analysis starts from the monthly chart and comes down to the weekly, daily, and even lower time frames. The idea is to start from the bigger picture and then slowly but surely move forward to the lower time frames, counting waves of lower degree, until a tradable time-frame is reached. In doing that, you’ll find out that running corrections are really common!
Other educational materials
- Placing Pending Orders When Trading with Elliott
- How to Trade 2nd and 4th Waves
- The All-Important B Wave Retracement
- What Are Corrective Waves?
- Trade Forex with Simple Corrections
- Complex Corrections in Elliott Waves Theory
Recommended further readings
- Endogenous Financial Networks: Efficient Modularity and Why Shareholders Prevent it. Hazell, J. and Elliott, M., 2016. In 2016 Meeting Papers (No. 235). Society for Economic Dynamics.
- The Elliott’s Wave Theory: Is It True During the Financial Crisis Magazzino, C., Mele, M., & Prisco, G. (2012). The Elliott’s Wave Theory: Is it True During the Financial Crisis?. Magazzino, C., Mele, M., Prisco, G.,(2012), , 100-108.