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New Wave Pattern and New Classification of Extended Corrections in the FOREX Market.
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This article unites Dmitry Voznuy's two previously published works:
Introduction
For those who are interested in wave analysis it is not a secret that up to 65% of time the FOREX market spends in corrections, which are the most difficult periods to analyze and predict further price movements. Unfortunately, there is another problem: lack of literature about complex wave structures.
At the same time, analyzing financial markets, we come across wave patterns, which are just modifications of classical patterns, described in literature. Their features and characteristics are somewhat different from their prototypes, that makes it necessary to single them out as a separate class, e.g. Robert Prechter's research of leading diagonal triangles, which he singled out in a separate subclass Wedges because of their unique features and characteristics {5}.
In this work features and characteristics of new sub-class of wave combinations, Running Triple Patterns, are given. The author of this article, Dmitry Voznuy, analyzed them in the FOREX market and he suggests new classification of extended corrections, depending on their features.
1. Extended Wave Corrections
According to the Wave Theory of Ralf N. Elliott, price chart reflects traders' psychology. That is why the same or alike patterns on the chart should correspond with identical mass emotions. It is obvious, judging by price charts, that horizontal or almost horizontal formations take the majority of corrective time.
That is why it is natural that a horizontal triangle pattern is the best studied extended wave correction, that is correction which consists of more than three waves. Its unique characteristics make it easier to analyze and predict financial markets. That is why every more or less horizontal and extended wave pattern was chosen for analysis and comparison.
Several types of extended corrections were described by Alfred Frost and Robert Prechter in their most complete description of the Elliott Wave Theory {1}:
- triple combinations (triple threes (ТТ) and triple zigzags (ТZ)),
- horizontal triangles (Т).
Let us review the main features of these patterns.
1.1. Triple Three
Triple three pattern is an array of overlapping wave corrections of simpler types (lower degree), including various types of zigzags, flats and triangles. Each action wave is labeled W, Y and Z. Reaction waves, labeled X, may assume the shape of any corrective pattern, though zigzag is most common. This pattern is shown schematically in Figure 1 below.
Figure 1. Outline of the Triple Three Pattern.
The first simple pattern (W) often constitutes an adequate price correction in the triple three, whereas almost horizontal doubling (Y) or tripling (Z) appears to occur mainly to extend the duration of the corrective process. Sometimes additional time is required to reach the opposite channel line or to become similar to another wave correction in an impulse.
Thus, a triple three is an extended horizontal wave structure 3-3-3-3-3.
R.Elliott in his book “Nature’s Law” (1946) {2} indicated that the entire formation “could slant against the larger trend” {1}, that is may have bias against the previous trend. Alfred Frost and Robert Prechter wrote {1} that “…we have never found this to be the case” (about the stock market).
The thing is that Alfred Frost and Robert Prechter apply additional restrictions to the triple three – they consider that no more than one zigzag may occur in this pattern as action waves W, Y, Z and no more than one triangle in the whole pattern {1} (the latter results from the features of the triangle itself). Probably, the authors think that the second and the third zigzags may turn this pattern from horizontal into countertrend pattern (compare Figures 1 and 2).
1.2. Triple Zigzag
Judging by the wave structure, triple zigzag pattern is a particular case of a triple three pattern, where each of its action waves may be a zigzag only (simple/double/triple). Action waves are labeled W, Y and Z. Reaction waves, labeled X, may assume the shape of any corrective pattern, though zigzags are most common. This pattern is shown schematically in Figure 2, below.
Triple zigzag differs from the other patterns not only by its more sharp angle (refer to Figure 2), but by its goals also. First zigzag (W) of a triple zigzag pattern is rarely large enough to constitute an adequate price correction of the preceding wave. The doubling (Y) and tripling (Z) of the initial form is usually necessary to create adequately sized price retracement.
Figure 2. Outline of the Triple Zigzag Pattern.
Thus, a triple zigzag is an extended wave structure 3-3-3-3-3.
Horizontal triangles present a separate sub-class (refer to Figure 3 below). Horizontal triangles are the most famous, best studied class of horizontal corrections. They have their own system of labeling and they differ by some distinct features, such as, for example, restrictions of location in the pattern of the larger degree, that the other mentioned types of corrections do not have.
1.3. Horizontal Triangle
Schematic patterns of regular triangles are shown in Figure 3 below.
Figure 3. Outlines of Horizontal Triangle Patterns.
Horizontal triangle consists of five overlapping corrective waves. Wave E may also be a horizontal triangle. Forming triangle lines always slant in different directions. All types of triangles may be subdivided into two groups – contracting (6 types in the upper part of the chart) and expanding (2 types in the lower part of the chart).
Wave E of a contracting triangle may not reach basis line A-C or break it but it still can not leave price area of wave C, otherwise triangle geometry will be broken.
Thus, a triangle is an extended horizontal wave pattern 3-3-3-3-3.
1.4 Similarity and Difference of Extended Corrections
First of all it should be noted that every extended wave correction has identical wave structure 3-3-3-3-3.
Triple zigzag is a particular case of a triple three pattern, as all its action waves may be only zigzags by definition. In accordance with its tasks, it may be the deepest correction among all extended corrections.
External difference between a triangle and a triple three is in quite a conventional structure of these patterns. They are almost horizontal and their inner structures are absolutely identical. These patterns show traders' balance of strength in financial markets, their hesitation. Thus, but for different system of labeling, they differ only by additional restrictions, applied to the triple three patterns by Alfred J. Frost and Robert R. Prechter {1}.
Due to the classics of the wave theory we know that it is horizontal triangle, that may be only the prior wave in the pattern of the larger degree, that is:
- the forth impulse wave,
- wave B of a zigzag,
- wave X in a double combination,
- second wave X in a triple combination,
- the final wave in a double/triple three, preceding the final wave of the larger degree.
Due to this feature some important restrictions may be applied to its position in the pattern of the larger degree, that is the following patterns can never be triangles:
- the second wave of impulse or wedge,
- wave W of a double three,
- waves W, Y and the first wave X in a triple combination,
- waves A, B, C of a horizontal triangle,
- waves 1, 2, 3 and 5 of a diagonal triangle.
These features are significant for those who analyze financial markets using Elliott Wave Principle, though it is not clear why these features are not characteristic for the other horizontal or almost horizontal extended corrections.
2. Running Corrections
As it was mentioned earlier, external difference between a triangle and a triple combination is in the shape of the patterns. Triangle forming lines always slant in different directions (one line may be horizontal). Both lines of an ideal triple combination should be either horizontal or against the predominant trend.
That is why any deviation of the triple three forming lines triggers either slant of these lines in different directions or slant in the same direction but along the trend of larger degree.
When the forming lines slant in different directions, a horizontal triangle is formed due to the identical inner structure of these patterns (3-3-3-3-3). When forming lines slant along the dominating trend, a running triple combination is formed. It has not been studied ever before.
Let's speak about known types of running corrections. I could find descriptions only of two such patterns, whereas other patterns were only mentioned.
Running flat is one of them. In “The Wave Principle”, 1938 {2} by Ralf N. Elliott, it is called strong correction.
Hamilton Bolton considered it to be an irregular type of corrections, together with an expanded flat. He wrote about it not in his famous book “The Elliott Wave Principle. A Critical Appraisal.” (1960), but in 1965, in his annual magazine “The Elliott Wave Principle of stock Market Behavior. Bank Credit Analyst Supplement” {3}.
Robert Balan in his book “Elliott Wave Principle. Applied to the Foreign Exchange Markets.”{6} just repeated Hamilton Bolton's classification.
In 1967 and 1970 in column “Thrusts” in “The Elliott Wave Principle of stock Market Behavior. BCA Supplement” {4}, which Alfred Frost continued to publish after Hamilton Bolton death, he wrote:
“A flat formation is generally followed by dynamic market action, which Elliott called a thrust. Within a thrust, corrections are usually subnormal in character, giving impetus to each successive move up or down. Inverted flats are followed by downward thrusts. Triangles have the same technical implication as flats in generating strong market action.”
At last, in 1978 Alfred Frost and Robert Prechter in “Elliott Wave Principle. Key to Market Behavior.” {1} presented new term “running flat”:
“In a rare variation on the 3-3-5 pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended. … (as in Fig.4) … Apparently in this case, the forces in the direction of the larger trend are so powerful that the pattern is skewed in that direction.”
Figure 4. Outlines of Running Flat Patterns.
In 1997 Robert Miner in “Dynamic Trading” {7} mentioned similar running correction as a pattern, preceding continuation of the strong trend. But he assumed that wave A of this correction may consist of 5 waves, and sometimes wave B may be shorter than wave A.
Besides running flat Alfred Frost and Robert Prechter described in their book {1} another type of running patterns - running triangle, which wave b expands outside the beginning of wave a, comparing with regular contracting triangles, formed within the price area of its wave a (refer to Figure 5 below).
Figure 5. Outlines of Running Triangle Patterns.
“Running double three” and even “running triple three” were briefly mentioned only once by Glenn Neely {8}. They were referred to as “very rare patterns” and there was even no draft of running triple three.
I did not manage to find any research of this type of corrections in sources, known to me. Nevertheless, these patterns are too frequent in the FX market to ignore them.
3. Running triple combinations
Running triple combination (RTC) or Running triple pattern (RTP) combines features and characteristics of their nearest relations - a triple combination and a horizontal triangle.
3.1. Features of Running Triple Pattern.
RTP is a combination of overlapping wave corrections of simpler types, including various types of zigzags, flats and triangles. Each action wave is labeled W, Y and Z. Reaction waves, labeled X, may assume the shape of any corrective pattern, though zigzags are most common. Forming lines of this pattern always slant in the same direction, coinciding with the direction of the preceding trend. Judging by the external shape, contracting and expanding running triple patterns are distinguished (refer to Figure 6 below).
Figure 6. Outlines of Running Triple Patterns.
Just as a horizontal correction, running triple pattern reflects hesitation of traders, strength balance of bulls and bears, which is gradually outbalanced by the leading trend. It triggers some definite mutual positions of its highs and bottoms and the final price thrust after it (refer to Figure 6).
Just like their classical prototypes, running triple patterns are subdivided into:
- running triple threes (RТТ);
- running triple zigzags (RTZ).
Judging by wave structure, running triple zigzags are a particular case of running triple threes, as their action waves may be only zigzags by definition (simple, double or triple). But, once RTP data bank in the FOREX market had been analyzed, it turned out that the majority of them are running triple zigzags.
The main difference between running triple patterns and their prototypes (TT and TZ) is their characteristics rather than features, as they coincide with unique characteristics of horizontal triangles. Position of running triple correction in the pattern of the larger degree is one of the most important features.
3.2. Characteristics of Running Triple Patterns
I managed to find a running triple combination in the following positions in patterns of larger degree:
- wave 4 of an impulse and a diagonal triangle,
- wave B of a zigzag,
- wave X of a double zigzag.
This corresponds to three possible positions from five for horizontal triangles, an expanded horizontal wave structure. Moreover, I failed to find RTP in the positions where horizontal triangle should not be by definition:
- the second wave of an impulse, a wedge or a diagonal triangle,
- wave W of a double three,
- wave W and Y of a triple three,
- first wave X of a triple three or a triple zigzag,
- waves A, B, C of a horizontal triangle,
- waves 1, 2, 3 and 5 of a diagonal triangle.
These facts are well enough to suppose that a running triple pattern can be only prior figure in the pattern of larger degree by analogy with a horizontal triangle.
Moreover, when RTP is forming at the place of the forth impulse wave, like a horizontal triangle, the final price thrust, which follows it, in the majority of cases is tending to cover the distance equal, as minimum, to the height of the running triple pattern (H rtp). Very rarely the final impulse wave is 62% or 78% of this pattern height.
In case when a running triple three is wave B of a zigzag or wave X of a double zigzag, the price movement target after it should be better defined by the length of the first wave of the larger degree pattern and suitable Fibo coefficient, rather then wave X height. Even in these cases the price will try to cover minimum 62% of H rtp.
In different charts (weekly and smaller time-frame) I found lots of such patterns. Some of them are shown below.
3.3. Real Examples of Running Triple Zigzag Patterns
It seems that a running triple zigzag contradicts the essence of the wave theory, forming correction slant in the direction, not against the leading trend, forming not the deepest but minimal and even (very rear!) negative retracement. This is factually proved in the FOREX market. In the majority of cases RTZ forms retracements from 24% to 3% of previous impulse and the maximum negative retracement is fixed at the rate minus 3.38% (refer to Figures 7 and 8).
By this time there are more than 60 examples of running triple patterns in different time-frames in the data bank of RTP (> 95% out of them are RTZ). Table 1 presents mutual percentage of wave patterns in the FX markets with running triple pattern.
Table 1. Mutual percentage of wave patterns with RTP in the FX markets.
Of course, because of quite a small sample these figures may be considered approximate. Charts with a running triple zigzag pattern are shown in Figures 7-11.
Figure 7. RTZ as wave iv of an impulse. Negative retracement (-3.38%).
Figure 8. RTZ as wave (iv) of an impulse. Positive retracement (16%).
Figure 9. RTZ as wave (4) of a diagonal triangle.
Figure 10. RTZ as wave (b) of a zigzag.
Figure 11. RTZ as wave Х of a double zigzag.
Current classification of extended corrections should be modified as a new type of corrections emerged, moreover there are some contradictions in the current classification.
4. Classification of the Extended Corrections.
First of all I would like to specify some items in the current classification.
Horizontal position of the forming lines of a correction, theoretically possible at triple three patterns, is very rare on the real market and it may be transition state between slanting triple threes and horizontal triangles.
From my point of view, a horizontal triple pattern is much alike horizontal triangles, rather than classical slanting corrections judging by their form and characteristics. Even theoretically a corrective pattern with horizontal forming lines is just a particular case of horizontal triangles, being by its external shape some transition form between contracting and expanding triangles. It also should be noted that this pattern by its external shape is like a rectangle (or a parallelogram).
More than that, judging by internal structure triple patterns with horizontal forming lines may consist of zigzags (as well as triangles), that is to be triple zigzags according to the old classification, preserving its horizontality. In this case one feature of classical triple zigzags is lost – sharp angle of development and goals, assigned by the classics to this type of corrections, are also doubtful.
Of course, external shape of extended correction (in case their internal structure is identical) is just a feature for its accurate identification, which does not allow to assign any pattern to the group with unique characteristics, is illustrative of triangles.
It is high time to mention new regularity among extended corrections in the FOREX market. It is known that horizontal triangles and running triple patterns possess some unique characteristics. For example, they may be only a prior figure in the pattern of the larger degree. The other corrective patterns have not had such characteristic till now.
| I succeeded in finding further interesting feature of extended corrections - the more horizontal classical triple corrective pattern (TT or TZ) is, the more it is probable that it will possess characteristics of horizontal triangle, thus being the prior figure in the pattern of the larger degree. |
According to the said above, a rectangle (as it is absolutely horizontal) may be assigned to the group of triangles in the classification of corrections.
To rectangle types should be also assigned “failed triangles”, that is corrections, which are at first assigned to the category of triangles due to the slant of their forming lines, but then they may be considered to be only a horizontal triple three (or triple zigzag) because of broken geometry. A triangle shape is often broken by the last price thrust before the direction of the trend is changed (wave Z), which leaves price area of wave Y (and W). One of examples is shown in Figure 12.
Figure 12. Rectangle as wave (iv) of an impulse.
Refer to Table 2 for complete modified classification:
Table 2. Proposed classification of extended corrections.
Note. In the table outlines of patterns are shown for the bullish market. For the bearish market they should be reversed.
The order of corrections in this classification reflects depth of possible retracement, formed by corrections: triple zigzags form the deepest retracement whereas running triple zigzags may form the smallest one.
Moreover, extended corrections of groups II – III possess all the features of horizontal triangles, the first one “tries” to do so.
As for labeling, I consider that it should remain unchanged.
Conclusion
From my point of view proposed classification reflects the main features and characteristics of extended corrections more clearly, not only adding new types, but also assigning groups features more logically.
Moreover, new patterns and characteristics of extended corrections will be useful for practical usage of the Wave Principle in the FX market.
Reference
{1} “Elliott Wave Principle. Key to Market Behavior.”, A.J.Frost, R.R.Prechter, Jr., 1978.
{2} “R.N.Elliott’s Masterworks. The Definitive Collection”, edited by R.R.Prechter, Jr., 1994.
{3} “The Complete Elliott Wave Writings of A.Hamilton Bolton”, edited by R.R.Prechter, Jr., 1994.
{4} “The Elliott Wave Writings of A.J.Frost and Richard Russell”, edited by R.R.Prechter, Jr., 1996.
{5} “The Elliott Wave Theorist”, November 2003 issue.
{6} “Elliott Wave Principle. Applied to the Foreign Exchange Markets”, Robert Balan, 1989.
{7} “Dynamic Trading. Dynamic Concepts In Time, Price and Pattern Analysis”, Robert Miner, 1997.
{8} “Mastering Elliott Wave aka Neo-Wave. Version 2.0”. Glenn Neely, 1990.
{9} “Running Triple Three Wave Pattern in the FX market”, D.Voznuy, Forex Magazine #83, August 2005. (in Russian)
(10} “Classification of Extended Wave Corrections”, D.Voznuy, Forex Magazine #91, October 2005. (in Russian)
December 6, 2005 The ideas given above are purely informational purpose only. This report was translated by Natalya.
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