Types of Zigzag Patterns
A zigzag is a corrective wave, and it is considered to be a three-wave structure. Being a corrective wave means it is labelled with letters and not with numbers: a–b–c. The beauty of a zigzag comes from the fact that both waves a and c are impulsive waves, while only the b wave is a corrective one. This means that while the overall a–b–c pattern is a corrective one, two parts of it are actually impulsive! It goes without saying that a zigzag is the only corrective wave that resembles impulsive activity, and traders often mistake these two patterns. In a way, it is only normal for this to happen, as there are actually two impulsive waves of a lower degree within the overall zigzag. As was the case with the flat patterns, zigzags are of multiple types as well. They are not as diverse as flats, but there are three types of zigzags to consider.
The Key is in the C-Wave
If in the case of a flat pattern, the b-wave retracement was the thing that defined different types of flats, whereas for zigzags, the b-wave retracement is crystal clear: It should not end beyond 61.8% of the previous a-wave. Having said that, the only element to differentiate between different types of zigzags is the c-wave. Before moving forward, please consider again that the c-wave in a zigzag is always an impulsive wave. As a general rule, it is not possible for the c-wave to be shorter than the b-wave in any zigzag pattern, so this option should be ruled out from the start. Based on this, the three types of zigzag are as follows:
The C-Wave is Smaller than 61.8% of the A-Wave
This represents the least frequent situation, when the c-wave exceeds the end of the previous a-wave, but is less than 61.8% of it. Once again, the golden ratio proves to be essential in deciding what kind of a pattern the market will form. Having said that, the logical thing to do is to measure the length of the a-wave, take 61.8% out of it, and project it from the end of the b-wave. Keep in mind that it is mandatory for the c-wave to end beyond the end of the previous a-wave. If the resulting 61.8% measured move is not enough for that, it means that the whole pattern is actually not a zigzag. This type of zigzag is really important, as it calls for a sharp retracement in the opposite direction, so by the time the price moves beyond the end of the a-wave, a powerful countertrend move should be expected. The distance to be covered is a minimum of 80% of the whole zigzag, and more often it goes beyond full retracement. As a result, we can safely say that this type of zigzag is one that should be rather faded by the time the price goes beyond the end of the a-wave.
The C-Wave’s Length is Between 61.8% and 161.8% of the A-Wave
This is by far the most common set-up for a zigzag, and I would say that almost 90% of all zigzags fall into this category. Because they are so common, such zigzags are called normal zigzags. In order to trade a normal zigzag, one should look for a five-wave structure to be completed for the a-wave. This should be followed by a retracement of a minimum of 1% for the b-wave (if the b-wave is a running correction, don’t expect it to retrace much into the territory of the just-completed a-wave), but no more than 61.8%. The truth is that the more the b-wave advances into the territory of the a-wave, the less likely it is that the overall pattern is a zigzag. Therefore, a retracement of more than 38.2% and into the 50% level should be taken with a grain of salt, and from this moment on, the technical analysis picture should be influenced by consideration of other pattern. It is often the case that the a-wave and the c-wave – the two impulsive waves – are similar in both construction and length. Therefore, if the a-wave is a third-wave extension impulsive wave, chances are that the fifth wave will be a similar one as well. In order to trade such a zigzag, the way to go is to set a take profit equal to the length of the a-wave, posted on top of the b-wave. Even in a double or a triple zigzag, normal zigzags are expected to form rather than other types of zigzags.
The C-Wave is Bigger than 161.8% of the A-Wave
This uncommon situation usually happens when the whole zigzag is part of a triangle, usually a contracting triangle. Such a zigzag is either the entire leg of the triangle or just a part of it. It is highly unlikely that this zigzag is part of a double or a triple zigzag; but most likely, if it is to be part of a complex correction, it is a double or triple combination. Between the two complex corrections, the most likely price will form a double combination rather than a triple one. If the a-wave is an impulsive wave with a third-wave extension, look for the c-wave to be either a fifth-wave extended impulsive wave or a third-wave extension but with a very small second wave. It is typical for a small second wave in an impulsive move to be followed by a super-extended third wave, and this explains very well why the c-wave is that long. All three types of zigzag are important in understanding how complex corrections function, and how they were classified by Elliott. In fact, understanding simple corrections, such as zigzags and flats, is just the first step in understanding complex corrections, as these ones are formed by simple corrections as well, connected by an x-wave. So far we have looked at the types of flat and zigzag patterns, but the commonest simple correction is yet to follow. I’m talking about types of triangles and how to interpret them, and this will be the subject of our next article here on the Forex Trading Academy: contracting and expanding triangles.
Other educational materials
- Defining Corrective Waves
- Use the Fibonacci Extension Tool in Elliott Waves Theory
- Different Fibonacci Levels Important When Trading with Elliott
- Trading Different Types of Extended Waves
- Placing Pending Orders When Trading with Elliott
- How to Trade 2nd and 4th Waves
Recommended further readings
- “Pairs trading.” Elliott, Robert J., John Van Der Hoek*, and William P. Malcolm. Quantitative Finance 5, no. 3 (2005): 271-276.
- Some evidence on option prices as predictors of volatility. Edey, M. and Elliott, G., 1992. Oxford Bulletin of Economics and statistics, 54(4), pp.567-578.