The Elliott Waves Theory is one of the most difficult trading theories that exists, even though it seems to be extremely simple. The problem with understanding Elliott is the complexity of different cycles of different degrees that makes starting out a difficult task.
To make things even worse, according to Elliott, there are some “hidden” or “missing” waves as well. Even though they cannot be seen on all time frames, they must be counted.
By default, a missing wave is always an intervening x wave or a connecting one. This means that the wave is so small that traders need to go down to a lower time frame to properly identify it.
However, counting waves on a time frame smaller than the hourly chart is not recommended. To avoid this, the labeling can be done by simply putting the two letters that represent the counting one to another.
Because the missing wave is always an x-wave, it means it follows a c-wave of either a flat or a zigzag. That is the first part of a complex correction.
How do traders know that market is forming a complex correction with a missing x-wave? The answer comes from the following; such a correction resembles an impulsive wave!
However, simply looking at the rules of an impulsive wave to see if they are followed should be enough for telling us if a missing wave is in place. One such rule is the rule of alternation.
According to it, the corrective waves in an impulsive move must be different. The time taken for the two corrective patterns should be different, as well as the distance the price travels and the complexity of the pattern.
In other words, if the second wave in the impulsive move is a simple correction, most likely the fourth wave will be a complex one. Moreover, as we know the time taken for the second wave before the fourth wave starts, all we should do is to measure it and to look for the fourth wave to take either less or more time.
If the rule of alternation as mentioned above is not respected, chances are that is not an impulsive wave. This leaves room to only one possibility; the market made a corrective wave.
Another possibility that might lead us to the conclusion that the market formed a missing wave is to look for the equality rule. Such a rule is referring to the non-extended waves and it simply means that they cannot be equal.
If they are equal, this is possible only if a fifth wave failure is in place, or the fifth wave is not able to pass the end of the previous third wave. Such a possibility should be discounted as its forming is extremely rare, even in the currency markets.
The picture below shows two similar waves having two counts. The first one is the incorrect one as the wave is interpreted as being an impulsive move. This is totally wrong; either the rule of alternation or the rule of equality is not respected.
Meaning, the correct way to count is to consider the possibility of a missing wave. As mentioned earlier, this can only be labeled as an x-wave.
The majority of the time the overall pattern is being a double flat; based on the retracement level of the b-wave that forms the first corrective phase of the whole pattern. However, occasionally, a missing x-wave can appear in a double or even a triple combination, even though this should be viewed as a rare pattern.
To label the missing x wave, we must measure the whole length of the so-called third wave in the incorrect count. Find the fifty percent retracement and simply mark that area as the proper place for the end of the c-wave, that ends the first corrective wave and the place where the missing x-wave formed.
The missing wave concept is a difficult one to understand, but sometimes market interpretation leaves no room for error. To give you an example, imagine that you are trading a flat pattern, or any kind of b-wave in any possible pattern (b-waves are always corrective waves).
Even if the b-wave resembles an impulsive move, it must be a corrective wave and this means it must be labeled with letters. In other words, while it looks like an impulsive move, simply check the two rules mentioned in this article and you’ll find the missing wave.
If you scratch beneath the surface of the Elliott Waves Theory, you’ll find that there are plenty of details that will make you understand why it is one of the best trading theories. The only thing that matters is to pay attention to those details and to find the correct interpretation.