Elliott waves are either impulsive or corrective. Impulsive wave give direction to the market and corrective patterns are only pauses of the longer term. After the correction, the trend will be resumed. An impulse and a correction form together the basic pattern of financial markets, which is shown below.
Basic elliott wave pattern
The impulse consists out of five waves and the correction out of three, six or nine waves. Corrections can be quite complex and a wave is probably a correction if you cannot count it or if it confuses you. Every wave is a bigger and a smaller version of another wave. This is a really important characteristic of Elliott wave! It allows you to trade it on a 1 minute chart but also on a weekly chart. The patterns are the same. In nature this phenomenon is called a fractal and it was one of the reasons that the man who discovered Elliott waves (Ralph Nelson Elliott), named his book Nature’s law. A fractal is a shape which can be divided into parts, each of which is a smaller copy of the whole shape. An example of fractal in nature is shown below.
Example of a fractal in nature
Elliott used the term “degree” to distinguish between the different sizes of the shapes. The image below shows the basic Elliott wave pattern with a smaller degree of each pattern. The five wave pattern has five wave patterns on its own.
Elliott wave pattern with 2 degrees
We will describe the Elliott wave patterns one by one, starting with the impulsive (or motive) waves followed by the corrective Elliott waves. Always start counting the patterns from major high’s or lows. But before we start counting, it is important to memorize these three rules:
- Wave 2 of an impulse cannot break the start of wave 1
- Wave 3 of an impulse is never shorter than wave 1 OR 3 of that same impulse
- Wave 1 and wave 4 are not allowed to have overlap
Don’t worry is you don’t understand what this is all about, it will be clear after you have seen the first Elliott wave pattern: the impulse.
Impulsive Elliott wave patterns
Markets behave in impulse or corrective waves as described. The first category is explained first.
Impulse
The impulse is a five-wave pattern with very predictable characteristics. Three waves move in the direction of the larger waves and two waves move countertrend. The three waves are impulses on their own and they also have five waves. The two countertrend waves are the two corrections. The impulses are labeled 1, 3 and 5 and the correctives 2 and 4. The market is always somewhere in an impulse of the largest degree. All the other waves are part of this impulse.
Elliott wave pattern - Impulse
Leading diagonal
The leading diagonal (LD) is the start of a brand new trend or correction, it only occurs in the first wave of an impulse or a zigzag. There is some debate going on if a leading diagonal also appears at the start of bearish trends or corrections. We think it does, contrary to common believe.
Leading diagonals have 5 waves, three impulsive and two corrective. The difference with an impulse is that wave 1 and 4 are allowed to overlap. Wave 1 is bigger than wave 3 and wave 3 is bigger than wave 5, in other words: it must converge! LD’s are retraced deeply and the ensuing trend will be fast and profitable.
Elliott wave pattern - Leading diagonal
Ending diagonal
The market will show an ending diagonal if it is going to chance trend. This explains the word “ending”! The ending diagonal occurs only in the fifth wave of an impulse or in the C wave of a zigzag or a flat. The pattern has five waves, which are each corrective (have three subwaves). All subwaves are labeled with a number. The pattern must contract, so wave 1 is bigger than wave 3 and wave 5. The trend after the ending diagonal will be fast and very profitable if you have a good timing. The image below shows an example of an ending diagonal.
Elliott wave pattern - Ending diagonal
Corrective Elliott wave patterns
The job of corrective Elliott wave patterns is to give markets a pause before they resume trend. Markets struggle with countertrend moves and that’s why they are a mess. It is hard to count the correctives, but as soon as you know the end of a correction to enable to position yourself for the next trend in your favor. Corrections are not five wave patterns and we will discuss them one by one.
Zigzag
The zigzag (ZZ) is the most common Elliott wave pattern and the basic building block of every market. The zigzag pattern is relatively simple and has a three wave structure called A, B and C. The first (A) and last waves (C) are impulses, which are connected by a corrective (B). The corrective can take any form and does not break the start of wave A. Wave C is normally as big or bigger as the largest impulse of wave A. A zigzag corrects the trend quickly and it is over before you even know. The image below shows an example.
Elliott wave pattern - zigzag
Double and triple zigzags
Zigzags occur sometimes two or three times in a row, these patterns are called double (DZ) and triple zigzags (TZ). The labels of a DZ are W, X and Y. A TZ is labeled with the letters W, X, Y, XX and ZZ. Each zigzag is connected to the next with another corrective (the X or the XX). Below some examples of a double and a triple zigzag.
Elliott wave pattern - double zigzag
Elliott wave pattern - triple zigzag
Flats
A flat is a sideways corrective, it moves nowhere. An ordinary flat has an A-, B- and a C-wave. The first two waves have three sub waves. The C-wave is impulsive. The target of the A-wave is the fourth wave of the prior impulse. The target of the B-wave retraces all the way to the start of the A-wave. The C-wave takes the market back to the start of the B-wave. The B-wave is ugly and hard to predict, but the C-wave gives excellent trading opportunities. As soon as you see a very messy B-wave, you must be ready for the C-wave because they move really quickly. Flats occur more often in the fourth wave of an impulse in comparison to the second. In many cases, it precedes or follows an extended impulse.
Elliott wave pattern - flat
A flat is called an expanded flat when the B-wave moves past the start of the A-wave. The following C-wave gives an even better opportunity because it normally goes well beyond the start of the A-wave.
Double and triple flats
Flats also morph into double (D3) and triple flats (T3) every now and then. Most traders hate these patterns because they seem to last forever. The waves of the D3 are labeled W, X and Y followed by a XX and a Z in case it extends to a T3. The images below show an example of a double three and a triple three.
Elliott wave pattern - double flat or double three
Elliott wave pattern - triple flat or triple three
Contracting triangle
A contracting triangle (CT) is a corrective pattern which only occurs in IM-4 and ZZ-B. This makes this pattern very powerful because it gives you very much information about the current moment in time. The contracting triangle has 5 waves, labeled A, B, C, D and E. Volatility and volume is decreasing during a CT. The rules are:
CT-C < CT-B
CT-D < CT-C
CT-E < CT-C
The target of the market after the CT depends on the length of the last wave which terminates in the start of wave A.
Elliott wave pattern - contracting triangle
This was a summary of the most important Elliott wave patterns. It is understandable if you can’t memorize them all right away. The table below shows an overview of the sub waves of each Elliott wave pattern. You can use this elliott wave pdf as a cheat sheet during your elliott wave forecasting.
An overview of the patterns
Impulse: 5-3-5-3-5
Leading diagonal: 5-3-5-3-5
Ending diagonal: 3-3-3-3-3
Zigzag: 5-3-5
Double zigzag: 3-3-3
Triple zigzag: 3-3-3-3-3
Flat: 3-3-5
Double flat: 3-3-3
Triple flat: 3-3-3-3-3
Contracting triangle: 3-3-3-3-3