Elliott Waves Theory is perhaps the one theory that is misunderstood by most traders. This is because the whole principle seems to be a very simple one.
Its subtleness and details are not for everyone. Even missing a small detail can make the difference between a good and bad analysis.
There is a strong belief among Forex traders that when using the Elliott Wave Principle, the corrective waves in an impulsive move MUST end in the territory of the previous impulsive move.
This is a terrible mistake. It means that the 2nd wave in an impulsive move must end in the territory of the previous 1st one. The correct answer is that it doesn’t.
Elliott found that corrective waves, in strong impulsive moves, have the tendency to shift with the trend. In other words, in a strong, bullish motive wave, the 2nd wave will drift higher towards its end.
Therefore, it has all the chances in the world to end above the previous 1st wave’s end. This is a running correction, and the most common of them all is called a double three running pattern.
Trading a Double Three Running Pattern
Before talking about how to trade such a pattern, it is important to understand it. As you can see, the name is not really a friendly one, but one should not be scared. It is just a name.
Like any corrective wave with the Elliott Waves Theory, we should make a clear distinction to see if the correction is a simple or a complex one. As a rule of thumb, a double three running pattern is always a complex correction.
Moving forward with the logical process, a complex correction needs at least an intervening x-wave. We’ve treated the concept of a connecting x-wave in multiple articles here on ForexGator.com.
The next task is to see if the x-wave is a small or a large one, and in this case, it MUST be a large one. A double three running pattern is a complex correction with a large x-wave.
The picture above shows a running correction as was described earlier in this article. The biggest segment in the whole pattern is not an impulsive move, but the large x-wave that only looks like an impulsive move.
Understanding running corrections is one thing, and knowing how to label them is another one. Elliott said that any complex correction is subject to the x-wave (or x-waves) connecting two or three simple corrections.
We know by now that simple corrections are coming only in three possibilities; flats, zigzags, and triangles. As a rule of thumb, a complex correction, regardless of its nature, CANNOT start with a triangle.
This leaves us with only two possibilities for the start of the double three running pattern; a flat or a zigzag. To keep things as transparent as possible, below is the double three running that we want to label of a lower degree.
What is in between the end of the 1st wave and the end of the 2nd wave is our pattern, the double three running. To label it, we should use a lower degree cycle/count, and start with a flat, continuing with a large x-wave and end with a triangle.
How to Trade It?
The double three running pattern is shown in the chart above with a blue labeling. It starts at the end of the 1st wave in black, and it is the entire 2nd wave in the same degree/color/cycle.
Its internal structure is formed out of a flat pattern (the first a-b-c), a connecting large x-wave (the strong and powerful advancing move) and a classical horizontal triangle (the last a-b-c-d-e) structure. Like any running pattern, it ends above (as this is a bullish impulsive move) the 1st wave’s finishing point.
The overall pattern is a dangerous one because few traders know that running corrections even exist. For this reason, the common mistake is to label the end of the x-wave in blue, as the end of the 3rd wave in the overall impulsive wave.
In other words, people are looking to short the pattern after its completion. This cannot be more wrong, as the market is about to explode after the triangle is broken.
The way to trade it is to place a pending buy stop order on a break of the b-d trend line or simply wait for the b-d trend line to be broken before going long. Or, buy any break of the previous highs made by the x-wave.
Target should be minimum 161.8% of the first wave, projected from the end of the contracting triangle. A running pattern is followed by a strong impulsive move because most traders are being caught on the other side of the market.
That is how potent such a pattern is, and it is not even the most powerful one Elliott discovered. We’ll discuss more of them in the upcoming articles.