In our previous post, we presented the first part of corrective waves. We discussed three basic corrective structures: zigzag, flat, and irregular. We also commented on concepts as alternation and volume. In this part, we’ll discuss a fourth corrective structure: the triangle. Additionally, we’ll present different trading setups for corrective waves.
The Triangle Structure (3-3-3-3-3)
R.N. Elliott gave particular attention to triangles as a corrective structure. All triangles contain five legs. To avoid any confusion, Elliott uses the term “legs” instead “waves”. Each leg has three waves as shows the following chart.
Elliott, in his treatise, defined two types of triangles: horizontal and diagonal. Horizontal triangles have four classes: ascending, descending, symmetrical, and reverse symmetrical.
Diagonal triangles are not corrective structures. Generally, the diagonal triangle occurs in wave 5 as an ending sequence; this pattern is called “ending diagonal.” It’s uncommon that ending diagonal appears in a C wave from an A-B-C formation.
When a diagonal triangle appears in wave 1, the structure is known as “leading diagonal.” In some cases, this sequence could be labelled as 5-3-3-3-5; but this sequence is so far of the formal 3-3-3-3-3 definition. Despite that Elliott didn’t discover this pattern, Prechter and Frost consider it as a valid structure. The following chart shows the diagonal structures.
“The trend is your friend,” says the older proverb. To know corrective waves provide us with significant opportunities to follow the trend. The big chances are in waves 3, 5, A, and C because they go in the trend direction. In this sense, we present different setups which allow us how to incorporate to the trend.
Finally, it’s essential to consider that the market can do whatever it wants. The wave analysis doesn’t mean that price action will follow our desires. For this reason, it’s essential before to pull the trigger, to manage the risk, determine elements as position size, risk and returns.