Basic Wave Analysis of Corrections By Richard Krugel | April 29th, 2019 |
| |
The human brain is very adept at recognizing patterns. Unfortunately, it's also easily confused when no discernible pattern is present.
Looking at bare price action is one such example: If you don't know what you're looking at, your brain may actively work against you when it's time to make important trading decisions.
The purpose of today's lesson is to show you a few techniques that will help you define price action, and ultimately, to help you make sense of what price is currently doing, and what it could be doing next. |
| |
*My overall strategy is aimed at achieving one specific goal:
Finding the end of corrections and entering low risk trades when the trend resumes again. Learn more on my website. |
| |
| |
Above is a weekly Copper chart. So, what are we looking at? Let's get started. |
| |
You can see that I drew in some basic trend lines (green and red) to define trend direction for this example.
Now, let's use some basic wave analysis to locate and identify the corrections (orange, labeled 1 – 7). |
| |
| |
| |
Most traders are familiar with Elliott Wave Theory (EWT) as a method to forecast future price behavior.
The problem most traders have with EWT is that it can be very subjective in nature, and seems to work better in hindsight.
BUT, when used in combination with other proven techniques, there's no denying its importance in technical analysis.
Basic EWT states that a trend will move in 5 waves before it comes to an end, while counter trend corrections generally move in 3 wave formations.
EWT also identifies the four main categories of corrective patterns, which are:
- Zigzags
- Flats
- Triangles
- Double Threes and Triple Threes
Next, we'll be taking a look at the 7 corrective patterns I labeled on our Copper chart above.
Corrections 1 and 7: Triangle Corrections |
| |
We have two triangle corrections on the chart I marked previously, and the first one is called a Descending Triangle. Triangles, according to EWT, are always labelled as A-B-C-D-E, and their main shape (orange trend lines) is what gives them their names.
Our first triangle correction has an angled top and a flat bottom, which is why it's called a descending triangle. |
| |
Our second triangle simply has a different shape than the previous one, and is called a Symmetrical Triangle due to the narrowing sideways movement that it tends to display.
Note that although the shape differs from the first, the labeling remains the same.
Corrections 2 and 3: Expanded Flat Corrections |
| |
Both correction 2 and 3 are named Expanded Flat corrections and are labelled A-B-C. |
| |
Note how the second Expanded flat correction's B wave exceeded the high of wave A, where in our first example wave B ended in line with the A wave.
Our second example had the C wave end in line with the A wave while the first example had the A and B wave line up BUT in both cases two of their waves lined up while one wave exceeded the other. This is why they are called Expanded Flats.
Corrections 4 – 6: Single ZigZag Corrections |
| |
These are the most common corrections and are yet again labelled A-B-C. In our example above, the B wave made a higher low than where the correction originated, with the C wave extending above the A wave. |
| |
Both the 5th and 6th corrections on our Copper chart are Single ZigZag's and they all ended in a C wave. |
| |
| Conlcusion |
This takes practice!
Review as much historical price action as you can, on any time frame, and mark these patterns as often as you can.
This will train your eyes and your brain to recognize them better when they pop up in real time.
It's also important to remember that although wave analysis is extremely helpful, it's only one step of my larger market strategy.
I use a combination of methods proven to be incredibly effective for low-risk, high-probability analysis (see my complete methodology here).
Thanks for reading along, now try it out on your charts!
To your trading success, |
| |
| |
| |
| |
没有评论:
发表评论