A cycle is a repeated sequence of events (OR BEHAVIOUR). Until that cycle is broken we can PROFIT FROM PEOPLES PREDICTABILITY. The prime levers to control them is ignorance, greed and fear.Understanding how people behave and react easily allows us to profit from them. THIS IS CRITICAL TO SUCCESSFUL TRADING
From original work published 29 April 2012.
As my basis of this part of the discussion I have used eSignal’s Advanced GET Elliot Wave description document (I am purely stating that in the hope that by giving them credit where it is due that I will not be sued for copyright and NOT as an advert for their system), and added in the MAP Waves explanations where appropriate in red.
2 – Corrective Patterns
Corrections are very hard to master. Most Elliott traders make money during an impulse pattern and then lose it during the corrective phase. An impulse pattern consists of five waves. A corrective pattern (with the exception of the triangle pattern) consists of 3 waves. An Impulse pattern is always followed by a Corrective pattern. Corrective patterns can be grouped into two categories: (1) Simple and (2) Complex.1. Simple Corrections. There is only one pattern in a simple correction. This pattern is called a Zigzag correction. A Zigzag correction is a three-wave pattern in which the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zigzag correction always has a five-wave pattern. In two of the three types of complex corrections (Flat and Irregular), the Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to be a Zigzag formation
2. Complex Corrections (Flat, Irregular, Triangle)The complex correction group consists of 3 patterns: (1) Flat, (2) Irregular, and (3) Triangle.Flat Correction– In a flat correction, the length of each wave is identical. After a five-wave impulse pattern, the market drops in Wave A. It then rallies in a Wave B to the previous high. Finally, the market drops one last time in Wave C to the previous Wave A low.
Irregular Corrections– In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning of Wave A or below it.
Using MAP Waves this indicates that A is 4, B is 5 of the next bigger level sub wave of which C is pivot 4, and 5 is the next bigger sub wave. So it is highly unlikely if this wave starts at the bottom that this would be the final top!
Triangle Corrections– In addition to the three-wave correction patterns, there is another complex corrective pattern that appears time and time again. It is called the triangle pattern. The Elliott Wave Triangle approach is quite different from other triangle studies. The five sub-waves of a triangle are designated A, B, C, D and E in sequence.
Triangles are, by far, most common as fourth waves. One can sometimes see a triangle as the Wave B of a three-wave correction. Triangles are very tricky and confusing. One must study the pattern very carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift thrust.
When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as Wave 3. When triangles occur in Wave Bs, the market thrusts out of the triangle in the same direction as the Wave A.
The reason for this thrust is that sub waves are present, a is pivot 2 (A=1) or 4 (A=3), b and c are sub wave pivots 1 and 2, and d and e are sub sub wave pivots 1 and 2, and this means that there very likely will be extensions in the next wave and this is why normally from this pattern you will see a strong thrust! If there is no strong thrust the opposite formation will develop to uncoil the spring energy built up here!
The Alteration Rule
If Wave 2 is a simple correction, expect Wave 4 to be a complex correction. If Wave 2 is a complex correction, expect Wave 4 to be a simple correction.
You now have a basic understanding of 80% of Elliott Wave Theory. Next look at how MAP Waves simplifies this whole thing using a modified Elliot motive wave.