Part III. Major EW Patterns – Correction
Commander in Pips: Since we’ve gone over Impulse motion of the market in EW theory, let’s also speak about correction. When the market has finished 5-wave pattern, the market should replace them with 3-wave correction move. All impulse moves are marked with numbers, while correction moves with letters. So, since market has completed a 5-wave trend, then, according to EW theory we should expect that it will turn towards a correction with a 3-wave countertrend.
Check out these pictures:
Pipruit: Looks like it works on bear market as well… Sir, and why are waves 2 and 4 mark with numbers, and not with letters –they are also some kind of retracement…
So, In general there are 21 different types of corrective move, according to EW Theory. But don’t be scared – all of them could be divided in three major types – Zigzag, flat and triangle.
Although here is corrective move after bull trend, this pattern looks absolutely similar for a correction after a bear trend as well, but with an upside direction. In general, Zigzag is a steep move against the previous trend. Wave B usually is the shortest in length compared to A and C. But as extensions could exist in impulse moves, so there could be some kind of them in corrective moves. Usually it looks like Zigzag repeats one by one twice or even three times. Other words 2 or even 3 Zigzags that linked together. Also take a look at second picture. Since we’ve said that EW are fractals – each wave in a Zigzag pattern could be broken in major 5-wave pattern but lower value. So, Zigzag is a most common pattern that is created by two motive waves (A and C), and one corrective wave, labeled B.
This type usually happens, when market has shallow countertrend momentum. So it has not strongly directional move against the previous trend. Because of that each wave of ABC pattern countered each other and all of them relatively the same in terms on length:
We’ve said “relatively equal in length”, because it not necessary for 100% so. It is possible that the end of B-wave will be slightly higher, than the beginning of A-wave, and the end of C-wave will be a bit lower then the start of B-wave etc. So, you should understand it in that way.
This type is a bit different from two previous ones, mostly by the structure of corrective move. Triangle type consists of 5 3-wave pattern, very similar to “Ending diagonal” in previous part of the current chapter. There could be descending, ascending triangles, as well as narrowing and broadening ones. As usual, you can more easily understand it by looking at the following picture:
5 years ago,
3 years ago,
Table of Contents
- FOREX - What is it ?
- Why FOREX?
- The structure of the FOREX market
- Trading sessions
- Where does the money come from in FOREX?
- Different types of market analysis
- Chart types
- Support and Resistance
Candlesticks – what are they?
- Part I. Candlesticks – what are they?
- Part II. How to interpret different candlesticks?
- Part III. Simple but fundamental and important patterns
- Part IV. Single Candlestick Patterns
- Part V. Double Deuce – dual candlestick patterns
- Part VI. Triple candlestick patterns
- Part VII - Summary: Japanese Candlesticks and Patterns Sheet
- Part I. Mysterious Fibonacci
- Part II. Fibonacci Retracement
- Part III. Advanced talks on Fibonacci Retracement
- Part IV. Sometimes Mr. Fibonacci could fail...really
- Part V. Combination of Fibonacci levels with other lines
- Part VI. Combination of Fibonacci levels with candle patterns
- Part VII. Fibonacci Extensions
- Part VIII. Advanced view on Fibonacci Extensions
- Part IX. Using Fibonacci for placing orders
- Part X. Fibonacci Summary
Introduction to Moving Averages
- Part I. Introduction to Moving Averages
- Part II. Simple Moving Average
- Part III. Exponential Moving Average
- Part IV. Which one is better – EMA or SMA?
- Part V. Using Moving Averages. Displaced MA
- Part VI. Trading moving averages crossover
- Part VII. Dynamic support and resistance
- Part VIII. Summary of Moving Averages
- Part I. Bollinger Bands
- Part II. Moving Average Convergence Divergence - MACD
- Part III. Parabolic SAR - Stop And Reversal
- Part IV. Stochastic
- Part V. Relative Strength Index
- Part VI. Detrended Oscillator and Momentum Indicator
- Part VII. Average Directional Move Index – ADX
- Part VIII. Indicators: Tightening All Together
- Leading and Lagging Indicators
- Basic chart patterns
- Pivot points – description and calculation
- Elliot Wave Theory
- Intro to Harmonic Patterns
- Divergence Intro
- Harmonic Approach to Recognizing a Trend Day
- Intro to Breakouts and Fakeouts
- Again about Fundamental Analysis
- Cross Pair – What the Beast is That?
- Multiple Time Frame Intro
- Market Sentiment and COT report
- Dealing with the News
- Let's Start with Carry
- Let’s Meet with Dollar Index
- Intermarket Analysis - Commodities
- Trading Plan Framework – Common Thoughts
- A Bit More About Personality
- Mechanical Trading System Intro
- Tracking Your Performance
- Risk Management Framework
- A Bit More About Leverage
- Why Do We Need Stop-Loss Orders?
- Scaling of Position
- Intramarket Correlations
- Some Talk About Brokers
- Forex Scam - Money Managers