Elliott Waves Theory is based on identifying either impulsive or corrective waves that the market is creating and then opening trades based on their implications. Impulsive waves are pretty straight forward to understand, the problem comes from corrective waves as there are multiple possibilities that can form.
First of all, corrective waves are either simple or complex, and already from this moment one can differentiate the future pattern to form. If the correction is a simple one, it can either be a triangle, a zigzag or a flat pattern.
For each and every type of simple correction listed above, there’s the need for them to be confirmed by future price action. If there is no confirmation, it means that the corrective wave to form will be a complex one.
Second, there is one thing that is mandatory in a complex correction; the presence of an X wave. Such a wave is being called an intervening X wave, or a connecting one, and it is a corrective wave on its own. This means, the X wave can be either a simple or a complex correction on its own, but this time of a lower degree.
Let me exemplify that: if the whole A-B-C move is a zigzag that turns out it is not confirmed as a simple correction, then an X wave must follow. The internal structure of this zigzag, or the count of a lower degree, should be as follows: (1-2-3-4-5) for the A-wave, (a-b-c) for the B-wave, and (1-2-3-4-5) for the C-wave. That is, waves A-B-C are of a 5-3-5 structure, or an impulsive wave, a corrective one, and another impulsive wave.
For the zigzag to follow, the structure could be a simple one, and this means it can be either a-b-c of a zigzag or a flat, or a-b-c-d-e of a triangle. However, the structure for this X wave can be a complex one, if, and only if, the first a-b-c is not confirmed as a simple correction.
These X waves are the ones that make a difference between the different corrections. It all has to do with the distance they retrace into the territory of the previous A-B-C correction. From this point of view, there are corrections with a small X wave and corrections with a large X wave.
Into the category of complex corrections with a small X wave, the double combination is by far the most common one. As a rule of thumb, a double combination cannot start with a triangle, and this leaves only two other possibilities for the first a-b-c; a zigzag or a flat.
There is a further differentiation between double combinations based on what the first correction is, a zigzag or a flat, but this will be the subject of another article here on ForexGator.com.
Coming back to the overall structure, after the zigzag or flat pattern that starts the double combination, a small X wave should follow. So far, the structure of this complex correction is looking like this: a-b-c-x.
As mentioned above, the X wave is a connecting or intervening wave, and this means that it is effectively connecting two simple corrections. If the first correction or the first a-b-c was a flat, then the one that follows after the X wave should be either a zigzag or a triangle.
This way, the structure of a double combination is looking like this: a-b-c-x-a-b-c, or zigzag-x wave – flat, or flat-x wave-zigzag. On the other hand, if the last correction in the sequence is a triangle, possible double combinations will look like this: a-b-c-x wave – a-b-c-d-e, and the first a-b-c can be either a flat or a zigzag.
The thing to do to correctly interpret double combinations is to keep in mind that they are almost always ending with a triangular pattern, so the break of the b-d trend line is key. It means that simply trading the triangle at the end of a double combination will do the trick to correctly interpret the end of it and the move to follow.
To sum up, double combinations are being given by the fact that the first correction is not a simple one and that the X wave to follow is not retracing big time into the territory of the first correction.
Knowing when a double combination is possible to form allows traders to correctly identify the nature of a move and to avoid being trapped in possible fake reversals. This is something that Elliott Waves Theory allows traders to do along with growing their account’s profitability.