A corrective wave is the counterpart of a motive wave. The net movement of a corrective wave, although not always, is against the preceding motive wave. Let’s think of it as a phase for the market to rest and regroup, before it commences the subsequent impulse wave.
This is the most important part to learn in the Elliott wave theory, because more than 75% of the time, almost all the markets are in some sort of corrective phase.
Do you know how the markets behave in corrections?
Types of corrective waves
There are mainly 3 types of corrective waves – ZigZags, Flats and Triangles. All corrective waves start with a 3 wave pattern either ABC or XYZ.
- Simple ABC
- Double three (combination of 2 ZigZag waves – XYZ)
- Triple three (combination of 3 ZigZag waves – WXYXZ)
- Regular flat
- Expanding flat
- Running flat
- Ascending triangle
- Descending triangle
- Contracting triangle
- Expanding triangle
Numbers in the brackets represent the number of underlying waves of the lesser degree for each wave (leg) of the pattern.
There are rules pertaining to identifying corrective patterns. Deep-diving into all types of corrective waves is beyond the scope of this post. However, I will tackle one of them – the ABC corrective wave.
The most basic form of correction is the ABC or the ZigZag pattern. It is of 5-3-5 lesser-degree-wave-count, which means it comprises of 2 impulse waves in the lesser degree (because the two 5s in 5-3-5 represent impulses). But these impulses are to the opposite direction of the preceding impulse of the current degree.
ABC correction is sharp and could retrace most of the impulse. In fact, the ABC correction is perceived as “the reversed trend”, when actually it is only a correction.
Elliott wave ABC correction rules
A and C sub-waves are impulses. So rules for impulse is same whether it occurs as the A, C labeled sub-waves of an ABC or 1, 3, 5 numbered sub-waves of a 12345 motive.
Rules for basic 5-wave impulses:
- Wave 2 does not completely retrace wave 1
- Wave 2 and 4 (corrective sub-waves) never overlap
- Wave 3 is not the shortest
These rules should be satisfied by the 5 waves of lesser degree within A, C sub-waves.
The B wave of the ZigZag is again a 3 wave structure in the lesser degree. This could either be an ABC or an XYZ.
Initially, I would suggest not to go deep more than 2 degrees deep to label the charts. In fact labelling on the current degree in concern is more than enough. For understanding purposes, you could outline the sub-waves of the 2nd degree.
ABC Elliott wave example
What better example is there for a sharp correction, except the mighty Bitcoin!
I have deliberately chosen the Bitcoin chart because now you will never forget the ABC pattern or the characteristics of a sharp corrective wave.
We use Elliott wave to understand and predict scenarios that could possibly play out. Nonetheless it is by no means a complete trading strategy on its own.
If you look closely, all of the Elliott wave patterns, structures and formations have two fundamental components in multiple degrees – they are:
- Motive or impulse wave
- Corrective wave
If you can identify and differentiate these 2 types of waves, and draw some connecting lines, then probably you will end up with Elliott waves structures.
Most importantly if you can clearly identify a corrective wave, the rewards can be exponential. Because what comes after a correction is an impulse. This is why you should continue to study all types of corrective waves in detail.