Elliott found that the market is moving in a five wave sequence which is corrected by a three wave move. This is the overall idea of the Elliott Waves Theory, and it seems quite a simple concept. Things are becoming more complicated when waves of different degrees are being involved.
Here on ForexGator.com, we’ve covered multiple aspects of the Elliott Waves Theory, but one aspect still needs to be mentioned; running corrections.
There is the misconception among Elliott Waves traders that the 2nd wave in an impulsive move must end between 50% and 61.8% of the previous 1st wave. While such a retracement is forming most of the time, it is not right to assume it is the end of the second wave, but merely the end of the first corrective phase that is part of the second wave.
A running correction will always end above the previous wave’s end (in a bullish impulsive wave) or below the previous wave’s end (in a bearish impulsive wave). This is extremely important as the extended wave is to be calculated from the moment the running correction ends, and not from the lower or higher points in that correction.
As a rule of thumb, a running correction is always being followed by an explosion that goes around 161.8% of the previous wave. Most of the time, a running correction is to be found as the 2nd wave in an impulsive wave, but it can form the b-wave of a zigzag as well.
In both cases, what a trader needs to do is to measure the length of the 1st wave, take 161.8% out of it and project that distance from the end of the running correction. It is unlikely that the 3rd wave to follow will exceed that projected target by far.
Running corrections are most of the time complex ones, and this implies the presence of at least an intervening wave, or a connective wave. Such a wave is always a corrective one, and it is being called an x-wave.
In this case, the x-wave must be a large one for the correction to have space to “run”, and this is what makes the difference between complex corrections, with a small x-wave, and ones with a large x-wave.
We covered here on ForexGator.com, complex corrections with a small x-wave, like double and triple combinations, double and triple zigzags and flats, so please refer to those learning center articles for more details about these patterns.
A large x-wave must end beyond the 61.8% retracement level of the previous correction and in the case of a running correction, it is mandatory for the x-wave to retrace completely the first phase of the correction. Sometimes the price action in the x-wave is such a powerful one, that people will have the tendency to assume it is an impulsive wave, like the 3rd wave in an impulsive move.
This happens when the x-wave is a double or a triple zigzag, as multiple impulsive waves are forming during those patterns.
A complex running correction, almost always ends with a triangle, and between contracting and expanding triangles, a contracting one is to be expected. To know when this triangle ends, please refer to the learning center article dedicated to contracting triangles on ForexGator.com.
Needless to say, the end of the running correction will be signaled by the price correctly breaking the b-d trend line of the triangle. This means that the running correction is formed by a simple corrective wave as the first phase, the large x-wave as an intervening wave, and a triangle as the last corrective phase of the whole pattern.
Therefore, two corrective waves connected by an intervening wave make up this running correction. However, a running correction is not always a complex one.
Simple corrections can end above/below (depending on the nature of the previous wave) the previous wave. There are two possibilities to be found as simple running corrections; a running flat and a running triangle.
A running triangle will always have the end of it, or the end of the e-wave beyond the starting point of the triangle, while the running flat will have a super strong b-wave that will most likely be a zigzag or a zigzag family pattern like a double or a triple one.
All in all, what is important to know about running corrections is not only the fact that they exist, but they do form quite often. If percentages are to be used, more than fifty percent of impulsive waves will have a running correction as the second wave, and this tells much about the implications of such patterns in the overall Elliott Waves analysis.
As part of a zigzag, running corrections are not that common, but they do tend to form especially when trading the forex market, as this market is characterized by aggressive moves.