Traders around the world embrace the Elliott Waves Theory because of its simplicity. At least, this is what drives people to it for the first time.
This simplicity comes from the very definition of it; five waves up corrected with three waves down. All these swings make up for a cycle, and Elliott identified multiple cycles interconnected to create the bigger picture of a financial product or security.
It is said that the theory works on everything that moves. That means if a chart exists, the theory works like a charm. This is a bit strange if one thinks of the fact that Ralph Elliott invented it based on how the stock market moved a few decades ago.
Nevertheless, because it shows the path of human behavior, it incorporates the much unknown characteristics of any market. Fear and greed make most market moves and Elliott Waves Theory shows them all.
We treated the subject intensively here on ForexGator.com and by now you should know both the basic conditions and some advanced particularities. However, the subject covered today is mind-blowing and a difficult one even for versatile traders; how to trade a missing wave.
What is a Missing Wave?
As mentioned earlier, every market moves in cycles of different degrees; both in impulsive and in corrective waves.
When a cycle ends, a new one starts. However, the new cycle is of the same degree, a lower or a bigger one.
These degrees, especially the lower ones, are not always visible. Let me give you an example. If you count the waves on the daily chart, you may thing you have an impulsive wave, or a five-wave structure.
However, in a five-wave structure, the 1st, the 3rd and the 5th waves must be impulsive waves too. This may not be visible on the daily time frame. Therefore, traders need to go on lower ones, like the four-hour and hourly charts for more clues.
Therefore, on the daily chart, these waves of a lower degree were invisible. But this is a normal aspect of the Elliott Theory; to go down on lower times frames to look for confirmation.
A missing wave is something that simply doesn’t exist, yet we must count on it/it. This is what this article is about.
Identifying the Missing Wave
The concept of a missing wave applies only in impulsive waves; to be more exact, in the 3rd wave extension impulsive waves.
As a reminder, when such an impulsive wave forms, it is the longest of the motive waves. 161.8% distance represents the minimum target for this wave, when compared with the other two motive waves.
A missive wave becomes obvious only when traders compare the 1st and the 5th wave in this impulsive move. They MUST be different in price.
In other words, the thing to do is to measure the length of the 1st wave and compare it with the 5th wave. If they are equal, the overall five-wave structure is NOT impulsive.
Take a quick look at the above labeling. How many times did you see a similar count? Probably many times.
Well, it is incorrect. Because the 5th wave equals the 1st wave, the move is NOT impulsive. In Elliott Waves terms, this means only one thing; if it is not impulsive, it can only be corrective.
This is the beauty of this theory; there are only two choices that one has to pick from. Now that we know the true nature of such a wave, how should we properly count it?
For this, we must consider a few things:
– Any corrective wave is labeled with letters, not numbers.
– Because of the apparent five-waves structure, we need to split the longest wave in two equal parts.
– On the wave’s left side is the end of the c-wave, and on the right side the missing or “invisible” x-wave.
Following the above instructions, the correct count looks like below:
In this case, the pattern is a complex correction with one small x-wave, called a double flat. The x-wave links/connects the two flat patterns.
The missing x-wave concept started from the fact that in an impulsive wave there is not the possibility for the 5th wave and the 1st wave to be equal. Actually, that is possible only if the impulsive wave is a so-called 5th wave failure.
However, such a pattern is quite rare and the 5th wave should not exceed the end of the 3rd wave. Therefore, it is impossible to count like this in our example.
The missing x-wave is important as it offers the clue or the link between an impulsive wave improperly labeled and a corrective wave. Such small details like the ones discussed make the difference between a correct and profitable count and one that lacks consistency.