One of the most confusing trading decisions to be made is when traders are facing two flat patterns that are connected by an intervening wave. The problem with the statement above comes from the fact that the two flat patterns that form the complex correction are the same in both situations; the only difference comes from the intervening wave.
The ability to notice the difference between the two patterns is very important when positioning for a future impulsive or corrective wave. Each pattern has different implications.
Depending on the time frame when the patterns form, it can be influential to the performance of a trading account on any given month. Let’s try to make a comparison between the two and see what to expect in both cases.
Implications of a Double Flat
A double flat pattern is a complex corrective wave and has the following structure: flat – x-wave – flat. Any flat is a three-wave structure or an a-b-c.
Therefore, the complex correction transforms in: a-b-c – x-wave – a-b-c. Moreover, the a-b-c of a flat is a 3-3-5 structure, specifically, it is formed out of a corrective wave – corrective wave – impulsive wave pattern.
Considering the logical process above, we can safely say that the correct structure of a double flat pattern is: 3-3-5 – x-wave – 3-3-5. So far, so good!
The Key Stays with the X-Wave
The x-wave, of the intervening/connecting x-wave, is always a corrective one. It can be a simple or a complex correction on its own, and it must be labeled of a lower degree.
It can even be a double flat on its own, but, again, of a lower degree. What is important in a double flat pattern is for the x-wave to not end beyond the 61.8% of the previous flat.
That is, the first flat pattern in the double flat! The thing to do to make sure this is not happening is to take a Fibonacci retracement tool, measure the entire length of the first flat (from the starting point until its ending point) and mark the golden ratio, or the 61.8% level.
If that is not reached, the pattern falls into the category of a double flat. Any double flat is looking like the image below.
The two blue lines show the start and the end of the first flat in the pattern. To be more exact, these are the levels the Fibonacci retracement tool should consider.
One needs to be very careful here; it is important for the x-wave not to end beyond 61.8%. However, parts of the x-wave CAN travel beyond that level.
To give you an example, imagine the x-wave is a flat with a failure (double failure, c-failure, b-failure, etc.). In this case, it is possible for the first corrective phase to be a strong one, the b-wave to go just slightly beyond 61.8% of a lower degree, and the c-wave to fail to take the highs in the previous a-wave.
This will result in the wave of a bigger degree (our x-wave!) to travel BEYOND the 61.8% of the first flat in the double flat pattern, but ENDING below that level. The chart below should be explanatory.
It is clear now that this interpretation is a difficult one, but the double flat is correct even though parts of the x-wave travel beyond the 61.8% level. What is important here is the end of the x-wave, and not its highest or lowest point.
While it may seem like these are things too complicated from an Elliott Waves point of view, I must add here that such situations are FREQUENT when trading the Forex market. High-frequency trading and other algorithms are the root cause for frequent and aggressive spikes higher or lower and correct interpretation of a move is subject to a great attention to details.
Where it Appears
A double flat pattern appears mostly in corrective waves. To be more exact, as part of corrective waves.
Let’s go back a bit to the start of this section and check the structure of a flat pattern: a-b-c or 3-3-5. Well, the double flat can be either the a-wave in a flat of a bigger degree or the b-wave in the same pattern.
It means that, by the time it is completed, the whole corrective wave of a bigger degree is NOT finished, but it will have at least another leg. Therefore, expectations for the bigger impact of the move to come should be calibrated accordingly.
As you can see, while Elliott Waves Theory is interpreted as being an easy one, this is true only for traders that do not pay attention to details. Those traders are most likely to fail when trading the Forex market.
Chances to survive in this ever-changing environment are slim enough for everyone to understand that making a profit from Forex trading, over the long run, is the result of hard work, discipline, and a sound money management system.