Elliott discovered that a market is traveling in impulsive and corrective waves. Impulsive moves are the ones to form more often than corrective waves, but this is not true when trading Forex.
One needs to remember that the Elliott Waves theory was developed on the stock market. At that time, and even today, the stock market in general or any individual stock is moving differently than the Forex market.
While some factors or drivers are the same, on the Forex market they should be interpreted differently. It so happens that these days on the foreign exchange market corrective waves are more common than impulsive moves.
Statistically, more than 70% of the time, the market is in consolidation. While this may be discouraging for those that are looking to trade only for the 3rd wave in an impulsive move, on a second thought, things are not that bad.
The purpose of this article is to demonstrate that there are even more impulsive waves when markets are ranging. The only thing is to know where and when to look for them.
Impulsive Waves with Corrections
The statement above may look reckless, but it is perfectly true. Any corrective wave has AT LEAST one impulsive move.
A zigzag is a corrective wave, an a-b-c, but both waves a and b are impulsive. Not only that they are impulsive, but are connected by a b-wave that has such a small retracement that most of the traders are mistaking the whole zigzag with an impulsive move. In reality, there are two impulsive waves of a lower degree.
How about a double zigzag? The same principle from above is valid here, with the difference that there are two small retracing waves, both of them probably around 38.2%, and four impulsive waves. The double zigzag is a vicious pattern that gives traders no chance to get out if they are caught in the wrong direction.
A triple zigzag is an ultimate killer for the ones looking for a retracement. Not only that the market will not retrace, but it will move from one stop to another until there are no more stops to be triggered.
This is happening because there are no less than six impulsive waves followed by little or no retracement. If traders ever experience a margin call, it is because of this pattern.
The chart above shows a triple zigzag that is having no less than six impulsive waves. The three a-waves and three c-waves in purple are impulsive waves.
It is normal that, in a triple zigzag, the zigzag that follows to be shorter in price and time than the previous one. This only confirms the overall pattern.
As it can be seen, there are little or no pullbacks for the whole pattern and traders that look to fade this move pay a dear price.
When compared with zigzags, flats have only one impulsive wave. The c-wave in the a-b-c arrangement of a flat is an impulsive move.
While this may not look like enough for it to be traded, it is. What matters the most is the nature of this impulsive wave and how it is subdividing.
Check the chart above. The whole pattern, in magenta, is an a-b-c. Judging by the retracement level of the b-wave, this is a flat.
Continuing with the logical process, the c-wave in the same sequence must be an impulsive wave. But if you paid attention to the previous articles here on ForexGator.com, Elliott deals with different degrees or cycles when addressing waves.
In this case, we are dealing with a “pattern-within-pattern” concept. To be more exact, we’re dealing with an impulsive wave that is part of an impulsive wave.
It so happens that the first impulsive wave is nothing but the first wave of an impulsive wave of a bigger degree. This makes the c-wave of the flat difficult to trade and to interpret. Why is that?
This is because the whole drop is having no less than seven (7!) impulsive waves of different degrees. Let’s list them below:
– Waves 1, 3 and 5 in purple are impulsive wave.
– Waves 1, 3 and 5 in green are impulsive waves.
– Wave c in purple is an impulsive move.
It should be clear by now that impulsive, active are present in corrective waves. Not only that they are present, but the price is more aggressive.
This article is not meant to create confusion among Elliott traders. It is meant to signal that counting waves under the Elliott Waves principle is neither easy nor straightforward.
Proper labeling is the result of various factors, starting with the time put in front of the charts, the historical data available and ending with understanding how waves and logic unfolds.
In the end, it is just a logical process. And this process is telling us that chasing for impulsive activity in corrective waves is more profitable than otherwise.