Following with the Elliott Wave theory that we have seen in the previous article, in this article we will see how the 5 impulse waves (in favor of the trend) proposed by Elliot are corrected and reversed by 3 waves against the trend called ABC Correction Waves.

Observe the following image:

ABC Correction Waves

ABC Correction Wave in a bull trend

The price swings marked by colored lines and the letters a, b, c form a corrective movement of the bullish wave formed by swings 1, 2, 3, 4 and 5.

Because we have used a bull market in the previous example does not mean that this theory does not apply to bear markets. The same pattern 5-3 may appear like this:

ABC Correction Wave in a bear trend

Waves inside a wave

Another important thing you should know about the Elliott Wave theory is that a price wave of any type can be made up of other small oscillations. Observe the following image:

Waves inside bigger waves on impulsive and corrective price movements

Can you see how Wave 1 is made up of 5 small impulse waves and Wave 2 is formed by 3 small corrective waves? Each one is always formed by small wave patterns. In other words, we can see a fractal structure in the market.

ABC correction waves example

Now let’s see a real example:

As you can see, this trading methodology do not fit perfectly in real life. You will also learn that sometimes it is difficult to point them out. As any other technical analysis tool, Elliot’s theory can fail sometimes. No trading approach is perfect. But the more you look and practice this method with real life examples the more experience will accumulate and over time you will be able to visualize these price patterns at a glance.

That’s all you need to know about ABC Correction Waves. Remember that the market moves in waves. Now when you hear someone say that “wave 2 is complete” you will know what it means.

Conclusions

The work of Elliot is not a simple concept, and it requires time to understand it and even more to apply it. What most experienced traders do is combine the rules of this methodology with other technical analysis tools, thus creating highly probable technical analysis setups.

What most experienced traders do is combine the rules of this methodology with other technical analysis tools, thus creating highly probable technical analysis configurations.