Corrective Waves

Corrective Waves

Corrective Waves

Corrective waves are basically sets of stock price movements that occur against the main trend. According to the Elliott Wave Principle, stock price movements occur in predictable cycles. These movements are broken up into motive waves and corrective waves. Motive waves are stock price movements in the direction of a trend, while the corrective ones move against that trend. The latter will be the subject of our article, so keep reading and find out everything you need to know about corrective waves!

Corrective Waves | The Elliott Wave Principle

Let’s first say something on the Elliott Wave Principle in general. The Elliot Wave Principle is the theory named after Ralph Nelson Elliott, who concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. Based on rhythms found in nature, this theory suggests that the market moves up in a series of five waves and down in a series of three waves. The key difference between this theory and other cyclical theories is that this one does not suggest absolute time requirements for a cycle to complete. In the next paragraph we will present most important types of the corrective waves, so read on!

Corrective Waves | Types of Corrective Wave Patterns

According to the Elliot Wave Principle, there are 21 corrective ABC patterns ranging from simple to complex. Don’t let the number of these waves scare you because you don’t have to memorize all of them. It’ll be enough for you to learn just a couple of basic types, and it will still help you a lot in trading.

The first one of the corrective wave patterns we would like to say something about is the zigzag formation. It shows very steep moves in price that go against the predominant trend. They can happen twice or even thrice in a correction (2 to 3 zigzag patterns linked together). The second type of corrective wave patterns would be the flat formations. It’s a simple sideway corrective wave. In flats, the lengths of the waves are generally equal in length. The triangle formations are patterns bound by either converging or diverging trend lines. Triangles are made up of 5 waves that move against the trend in a sideways fashion. They can be symmetrical, descending, ascending or expanding. These are the three most important types of corrective waves. Mastering those means you’re on your way to trading glory, so we recommend you dedicate yourself as much as possible to researching them thoroughly. This goes for everything else you might use in you analysis – fractals, Fibonacci Numbers, oscillators etc.

Corrective Waves | Conclusion

As you can see, corrective waves are very important elements in any market analysis. Although you can never predict the market’s movement completely accurately, there are always some tools that can help you obtain more accurate prediction. Corrective waves are one of those helpers. There are many of them, but if you can just learn how to handle the very basic ones (flat, zigzag and triangle), it will definitely improve your trading skills. Putting some time into this will surely pay off.

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FURTHER READING:

1. Liar’s Poker (M. Lewis, 2010)
2. The Essays Of Warren Buffett: Lessons For Corporate America (W. E. Buffett, L. A. Cunningham, 1997)
3. How To Make Money In Stocks (William J. O’Neil, 1995)
4. Midas Technical Analysis: A VWAP Approach To Trading And Investing In Today’s Markets (A. Coles, D. Hawkins, 2011)
5. Trading By The Minute (J. Ross, 1994)

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Author: Ben Prescott
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