The previous articled here on ForexGator.com showed what a double flat pattern is and how it should be traded and interpreted. A double flat is a complex correction that appears quite often on the Forex market.
What traders are not familiar with is the concept of a running correction. There is a misconception that corrective waves must end in the territory of the previous wave.
While this is happening most of the time, it is not mandatory. Especially on the Forex market, where there are so many swings and violent moves because of the HFT (High-Frequency Trading).
Running corrections are always followed by a sharp move higher (if the previous trend was a bullish one) or lower (if the previous trend was a bearish one). In terms of Elliott Waves, this will almost always be the extended wave in an impulsive wave.
All traders flirting with Elliott Waves analysis should know that the extended wave is minimum 161.8% of the previous motive wave, so the distance to be traveled is a substantial one. Moreover, another place for a running correction to appear is the c-wave of a zigzag, so the running correction will be the previous b-wave.
This is not that common, though, because of the time constraints the pattern will have a zigzag formation. Below are the key things to look for in a running double flat.
Implications of a Running Double Flat
The structure of this pattern is pretty much similar with the one of a double flat. In Elliott Waves terms, it means 3-3-5 – x wave – 3-3-5.
To be more exact, there are two flats connected with an x-wave. The x-wave, like any wave of this type, MUST be a corrective wave on its own; either a simple or a complex one.
The two flat patterns that are part of the running double flat can be any kind of flat (with strong, normal, or weak b-wave, with the three failures possible to form, a common or irregular one, and so on.)
How to differentiate between a running double flat and a double flat? Like always, the clues are given by the x-wave.
The Key Stays with the X-Wave
The intervening/connecting x-wave is holding the secret for the pattern. If in the case of a double flat, the x-wave is mandatory to end below 61.8% of the first flat pattern, in running double flat things are exactly opposite.
Not only should it not end below, but it should stretch beyond, far away from the 61.8% level. In strong trends, the x-wave will be even bigger, price wise, than the extended wave!
The above image shows what a running double flat is looking like. To fully understand the concept of a running correction, look on the left side of the image, at its starting point, then check the end of it.
At the start of a running pattern, something else ends. As explained at the start of this article, what ends there is, in most of the cases, the 1st wave in an impulsive move, or, rarely, the a-wave of a zigzag.
This makes the running pattern (in our case the running double flat) to be the 2nd wave in an impulsive move (most common setup) or the b-wave in a zigzag (less likely). Therefore, the appropriate labeling, on a bigger degree, should be the following:
The truth of the matter is that it is not important if the move prior to the running double flat is the 1st wave of an impulsive move or the a-wave of a zigzag. What matters is that it is followed by a strong, extended move, which is misinterpreted by most Elliott Waves traders.
As such, the speed and velocity will be stronger than in a normal third wave of an impulsive move or c-wave of a zigzag. That is when the easy money is about to be made.
How to Trade It
The key stays with the x-wave and the golden ratio, as always with Elliott Waves Theory. The following are steps to be taken to successfully trade a running double flat:
– Wait for the first flat to complete.
– Find out the 61.8% retracement level, by dragging a Fibonacci retracement tool from its starting point until its end.
– Carefully watch if the 61.8% is broken. If it is even pierced by parts of the x-wave, chances are it is going to be a running correction.
– Place a pending buy stop order (if the previous move prior to the flat pattern was bullish) or a pending sell stop (if the previous move was bearish) at the start of the flat.
– Place a stop loss at the end of the first flat.
– Look for a minimum 1:5 risk-reward ratio. That should give the end of the x-wave, as this distance is almost always traveled.
– After the second wave completes and the end of the x-wave is exceeded, go long/short for 161.8% extension from the move prior to the running double flat, projected from the end of it.