The currency market corrects more than it trends. This means that an investor using the Elliott Waves Theory to count waves is mostly dealing with corrective waves rather than impulsive waves.

The market can either form a simple or complex corrective move; for any market swing, investors must decide if the move is impulsive or corrective. Investors use letters to label the waves.

All corrective waves, simple or complex, are called “threes” or “three-wave structures”, even if the actual number of waves is sometimes larger than three. The term “threes” refers merely to the corrective nature and is the key difference between a corrective and impulsive wave.

Elliott found three types of simple corrections.

1. Flat patterns

A flat pattern is a three-wave structure with two corrective waves and one impulsive wave. Labeled a-b-c, only the c-wave is impulsive and follows all the rules of an impulsive wave as explained in a previous lesson in this course.

The key to a flat pattern is the b-wave’s retracement; it must retrace at least 61.8% of the previous a-wave. Flat patterns are the most common type of corrective waves, and we will look at them in more depth in a future lesson.

2. Zigzags

A zigzag is another three-wave structure which has two impulsive waves. Also labelled a-b-c, the a-waves and c-waves are impulsive, and only the b-wave is corrective.

Like a flat structure, the b-wave’s retracement is also critical here but, unlike the flat, it retraces less than 61.8% of the previous a-wave, so the a-b-c structure has zero meaningful retracements.

3. Triangles

By far the most common corrective structures, triangles almost always form on every timeframe. When the market expects a correction, chances are a triangle is at least part of the corrective structure.

Despite having five segments, a triangle is said to be a three-wave structure, because all its segments – a-b-c-d-e waves – show corrective activity, hence the “three” name.

A triangle rarely appears as a simple correction. If it does, it can only appear on the 4th wave and not the 2nd wave. A triangle can also form on the b-wave of a zigzag. However, most of the time a triangle appears as part of a complex correction. As you’ll find out later in this course, a complex correction never starts with a triangle, but it almost always ends with one.

Main Takeaways:

  • In a flat the b-wave retraces at least 61.8% of the previous a-wave.
  • In a zigzag the b-wave retraces less than 61.8% of the previous a-wave.
  • All corrective waves are called “threes” despite some having more than three segments.
  • Corrective waves can be simple or complex.
  • Triangles are most likely to be found in complex corrections.

FAQs about the Corrective waves in Elliott Waves Theory

What happens after Elliott’s corrective wave?

In Elliott Wave Theory, the market is viewed as moving in a repetitive cycle of eight waves. Out of these, five waves move in the trend direction and are called motive waves. The other three waves move against the trend and are called corrective waves.

After the completion of a corrective wave, labeled as waves A, B, and C, a new motive wave sequence usually starts, labeled as 1-2-3-4-5. This sequence indicates whether the trend will continue or reverse, depending on the larger wave pattern.

It’s essential for traders and investors who use this theory to predict market trends to understand the completion of the Elliott corrective wave. This knowledge helps them make informed decisions.

What happens after the ABC correction?

In Elliott Wave Theory, the market typically experiences a new motive phase after an ABC correction. An ABC correction is a three-wave pattern that consists of two smaller move waves (A and C) moving in the direction of the main trend correction, and one wave (B) that moves against it. This corrective pattern often indicates the end of the correction and the beginning of a new impulse or motive wave. This new wave is expected to move in the direction of the larger trend. For traders and analysts, recognizing the completion of an ABC correction is essential for forecasting future market movements and aligning their strategies accordingly.

What is the best time frame for Elliott Wave Theory?

The Elliott Wave Theory can be applied to various time frames, ranging from intraday to monthly or yearly charts, depending on the trader’s objectives and the market being observed. Choosing the best time frame for analysis is crucial to ensure the effectiveness of this theory. Short-term traders may prefer shorter time frames, such as minutes or hours, while long-term investors may find daily, weekly, or monthly charts more beneficial. It’s worth noting that longer time frames can offer a clearer picture of the market’s overall trend and potential future direction, thereby making Elliott Wave patterns more reliable and easier to identify.