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# Elliott Wave Theory Basics Explained

## Elliott Wave Theory Basics Explained - Corrective Waves

This second part of our Elliott Wave Theory Basics explained section, looks at the analysis of corrective waves. Corrective waves retrace part of the previous trend but never move beyond the origin of the previous impulse wave. In other words wave 2 never breaks the origin of wave 1 and wave 4 never breaks the origin of wave 3.

Waves 2 and 4, and A,B,C are corrective waves

The different types of corrective waves are a Zigzag, Flat, Triangle or a Combination.

 Wave Structure Labelling Zigzag 5-3-5 a,b,c Flat 3-3-5 a,b,c Triangle 3-3-3-3-3 a,b,c,d,e

## Elliott Wave Theory Basics Explained - Combination Waves

Elliott Wave theory combination waves can occur when a corrective wave has not met its price target or needs to extend in time. Typical combination waves are double 3's or triple 3's where a combination of zigzags or flats is joined together by an 'X' wave. 'X' waves are 3 wave corrective moves.

Double 3's are labelled W,X,Y each of which can be a zigzag or a flat. W and Y are the Two 3's connected by the X wave.

Triple 3's are labelled W,X,Y,X,Z each of which can be a zigzag or a flat. W,Y and Z are the Three 3's connected by the Two X waves.

The final wave in a combination can also be a triangle. Eg: A very shallow double 3 (WXY) could consist of a Flat (abc) for W and a Zigzag (abc) for X, ending in a Triangle (abcde) for Z.

## Elliott Wave Theory Basics Explained - Triangles

As with all Elliott Wave Theory wave identification, the internal wave formation is the most important factor in identifying Triangles in Elliott Wave Theory. Triangles subdivide into 3,3,3,3,3 and are labelled a,b,c,d,e.

It is important to remember that Elliott Wave triangles are not determined by shape and contracting price action in a converging triangular shape does not necessarily mean that it is an Elliott Wave Triangle.

A very common error we have found is that most of the stock chart patterns that we see purported by analysts to be a triangle are not actually valid, and is more wishful thinking than through reasoned analysis.

An Elliott Wave Theory Triangle is a particularly special feature as they can only appear at certain points in the cycle, this means that they can be extremely good guide in confirming to the technical analyst where we are at that particular point in the cycle.

Elliott Wave Theory Triangles

Elliott Wave Theory Basics Explained - Triangle Positioning

A genuine Elliott Wave Theory Triangle will only appear in the charts in certain positions within the cycle. They always occur in a position prior to the final wave in a move or as the final wave within a combination as mentioned earlier.

• Wave 4
• B wave
• X wave (final X wave in a Triple 3)
• Final wave in a Combination

### Elliott Wave Theory Basics Explained - Triangle Identification

Because triangles always appear in the position prior to the final move, this one of the instances where Elliott Wave theory offers a high value advantage by identifying some clear and very reliable trading opportunities to the trader who has a grasp of the current wave count.

Trading the price ranges as the  triangles themselves are forming tends to be a very high risk trading strategy.
As we suggested earlier, our experience at Traders Day Trading has found that genuine Elliott wave theory triangles are actually much less common that most analysts would have you believe.

We find that too many are over eager to identify a range bound market as a triangle simply because the price range may be converging in that shape. It is likely that the high value trading opportunity presented by these patterns lead the analyst to be open to wrongly identifying it as a triangle.

### Price Action Following an Elliott Wave Triangle

The price action following a complete valid Elliott Wave analysis Triangle count should be fast and furious, producing a spike like move to a set target. We can set the price target by measuring the deepest part of  formation and adding it to the point of the breakout from the converging Trend Line drawn through the extremes of waves (b) and (d).

Once the price target has been met, prices will very quickly return to the level of the apex of the Triangle where it can find some support..

On rare occasions, the breakout and final move can be long and drawn out as the final move develops into an Ending Diagonal producing a 'triangle on a triangle' effect.

Trend reversals from these points are extremely sharp and decisive.

Again, these patterns can occur at any degree of trend and traders can find them just as useful for day trading as they do for long term stock analysis.

Triangles are one of the most reliable Elliott Wave analysis patterns but traders should take extra care not to let wishful thinking cloud their judgement and as always, should ensure that they identify the point that they know the pattern has failed and negates its validity.

## How to Trade an Elliott Wave Theory Triangle Successfully

Once we have identified the possibility that a valid Elliott Wave Theory triangle may be forming, our strategy is to monitor the development of the pattern until it is possible to identify a clear and 'complete' wave count. ie; that the internal waves all subdivide into the required 3-3-3-3-3 construction.

It is at this point (e) where we will take our first position based on this pattern. The initial stop loss level should be placed immediately below the (c) wave low, and if this low at (c) is broken the triangle count immediately becomes null and void.