The previous article here on ForexGator.com stated that price spends most of the time in consolidation. That is so true.
It is a dangerous thing to consider. The more time that is spent on consolidation, the more chances are that traders will overtrade.
Retail traders are only about six percent of the overall Forex market. It means that it is not possible to influence the market, but merely to follow it. To do that, various trading methods are used; scalping, swing trading, investing.
Time can be used as a second indicator for being on the right side of the market. Today’s article is dedicated to a pattern that incorporates both price and time and it is extremely common in the Forex market; an elongated flat.
What Makes an Elongated Flat?
A flat pattern is a corrective wave. Meaning that the price is moving in a three-wave structure; a-b-c. Out of those three waves, only the c-wave is impulsive, while the a-wave and the b-wave are corrective.
The two corrective waves that are part of the flat pattern can either be simple or complex correction. In any case, if they are simple corrections, they must be confirmed by future price action.
Confirmation is made in time, not in price. Previous articles described how time is confirming the price. If that is not happening, it means the market is forming a complex correction.
Regardless the nature of the a-wave and the b-wave, one thing MUST happen; the b-wave should retrace beyond the end of the previous a-wave.
Not only that the b-wave must do that, but, in doing that, it must end beyond that level. Based on the exact place where the b-wave ends, we can name the type of the flat pattern created.
Elliott found different flat categories, based on how much the b-wave is retracing into the territory of the previous a-wave. However, all categories have something in common; an elongated flat.
The name of this structure comes from the length of the c-wave. While the b-wave’s retracement is telling us the category the flat belongs to, the c-wave, or its length, is telling us the type of the flat.
As a rule of thumb, every elongated flat travels beyond 161.8% of the previous b-wave. Having said that, it means that traders are using a Fibonacci tool to find out this level and that should be the minimum distance to be traveled by the c-wave.
Using Time as a Confirmation for Elongated Flats
Elliott discovered that time is as important as price. When counting waves, time is a crucial element part of the pattern recognition process.
One should imagine that the Elliott Waves theory is like a giant puzzle. The puzzle is made from various patterns that repeat continuously. On different time frames, on the different cycles…but they are the same patterns in the end.
It means that when starting to count, one is having an education guess about the pattern to form. Any clues or new clues that lead to finding the right pattern are welcome.
This brings us to the importance of an elongated flat. As patterns are part of the Elliott Waves theory, they are forming almost exclusively in a triangle.
To be more exact, not as any type of triangle but, as a contracting one. If you consider that the market is fluctuating most of the time, it is no wonder that these patterns are quite important.
Time is always important when confirming an elongated flat. There are two possibilities, actually, three, but the two that are going to be mentioned here form more often.
Below there are the two most common types of an elongated flat. From left to right, the first pattern is having the time for wave c being almost equal to the time taken for waves a and b to form. This comes as a confirmation that the market is going to form an elongated flat.
Another possibility would be to look at equality in time for the a and b waves. If that is the case, we have a clue that an elongated flat is forming.
As you can see, time plays an important role. Even before the start of the c-wave, traders using this pattern recognition approach know what the market is unfolding to next and what the wave of a bigger degree, or bigger cycle, is.
At the end of the b-wave, if time suggests an elongated flat is forming, the following information is available:
– An impulsive move as a c-wave should start.
– It should stretch beyond 161.8% of the b-wave
– It should take approximately the same amount of time as it took waves a and b to form
– The whole a-b-c structure is part of a triangle, either the entire leg of it or just a small part.
Armed with this information, traders can position themselves on the right side of the market. Once again, Elliott Waves as a pattern recognition approach proves that price and time go hand in hand when trading Forex.