Elliott Wave Part 2 – Corrective Phases
In the previous article, we looked at Elliott Wave Theory and the idea that trends unfold in a series of five “waves”. This week we will examine the all important corrective phase. A corrective phase can also be referred to as a counter trend move. Following a trend (five wave impulse phase) there is always a counter trend (corrective phase). The ultimate trade set up would involve finding the end of a counter trend move. Why? For example, let’s assume that a bearish counter trend move has just completed. Now we believe that a bullish trend is going to re assert itself because a bullish trend move (five wave impulsive phase) usually follows a bearish countertrend move (typically an ABC corrective phase.) Remember, we are trying to trade with the trend, not against it, and we achieve this by getting in at the end of a corrective phase. In addition, as discussed previously, the five wave impulse phase has no overlapping waves and is a very strong directional move. In other words, it should be easier to make money trading an impulsive phase, rather than a corrective one.
If the “perfect” trading system involves trading only the impulsive phases versus the corrective phases, how can we identify the end of a corrective phase? Elliott described so many different corrections in his book “The Wave Principle” that most Elliott traders have concluded that it’s almost impossible to find the end of a correction. However, despite the fact that Elliott described so many corrections, he did say that one of those corrections is more common that all the other ones. Which correction was he referring to? Elliott referred to it as the simple ABC zigzag correction. If the simple ABC zigzag correction is the most common corrective sequence, then shouldn’t it make sense to take note when a market has displayed one of these corrective structures and place a trade? There is no doubt that the market will do anything that it wishes, including turning into an even more complex correction, however if the simple ABC zigzag correction is the most common, then it is our opinion that we should take advantage of the fact that the odds are on our side to take a trade in the direction of the trend and possibly allow us to trade all five waves of an impulsive phase. In the next article we will examine exactly how to identify an Elliott Wave simple ABC zigzag correction.
Ross Beck, DMS, FCSI