The Elliott Waves Theory is one of the most comprehensive trading theories that exist. Ralph Elliott developed the theory around the way the stock market moved. While the Forex market didn’t exist back in those days (in the middle of last century), the principles are the same. According to Elliott, the overall market is the sum of its participants’ behavior. As such, no matter the financial product, the same factors influence it: greed and fear. Not once, these two elements have far bigger implications than a trading strategy on its own.
If traders can handle fear and greed, trading would be much easier. After all, trading any market is stressful. Trading the Forex market, is simply an emotional rollercoaster.
When developing the rules, Elliott started from two basic waves that form all the time: impulsive waves and corrective waves. According to Elliott, corrective waves further split into simple and complex ones.
The most comprehensive simple correction is the flat pattern. Here is how Elliott split them further.
Types of Flat Patterns
As mentioned above, a flat pattern is corrective. As such, traders label it with letters: a-b-c. Any Elliott Waves cycle has an impulsive and a corrective wave. The impulsive one is labeled with numbers, while the corrective one with letters. However, each wave or part of a cycle has different waves of lower degrees. Therefore, the a-b-c of a flat has the following structure of a lower degree: corrective-corrective-impulsive. It means that waves a and b are corrective, and only the c-wave is impulsive.
In any flat pattern, the key stays with the b-wave. To be more exact, with the b-wave’s retracement. The idea is to measure the length of the a-wave. The Fibonacci Retracement tool is perfect for this. Next, find the 61.8% retracement level. As a rule of thumb, the b-wave MUST retrace beyond that level. Based on the level reached, Elliott identified three categories for flat patterns.
Flats with Weak B-Wave
All flats in this category have a b-wave that retraces between 61.8% and 80% of the previous wave. No more, no less. In doing that, the b-have must keep its corrective nature. It can either be a simple or a complex correction on its own.
However, there’s a catch. The b-wave must end between those two Fibonacci levels. It doesn’t mean that’s the maximum point reached.
In fact, the Forex market is well-known for its wild swings. Traders look at the market tripping stops only to take the previous high/low and reverse. Such a move happens most of the times in a flat.
In this category, Elliott distinguished the following individual flats:
- Flats with b failure. Such a flat has the b-wave retracing between 61.8% and 80% of the previous a-wave, while the c-wave exceeds the b-wave’s starting point.
- Flats with double failure. This one has the same b-wave as the one above, but the c-wave fails to retrace entirely the b-wave. When this happens, the market forms a double failure: both the b and the c-waves fail.
- Elongated flats. While the b-wave’s retracement level is the same, this type of flat has a very powerful c-wave. Most of the times it exceeds 161.8% of the previous b-wave and sometimes it can go much, much more than this level.
Flats with Normal B-Wave
Elliott found that a normal b-wave retracement is anywhere between 80% and 100%. Again, no more, no less.
When this happens, the b-wave is normal. There are three types of flat patterns here:
- Common flat. While the b-wave ends between 80% and 100%, like all the b-waves in this category, the c-wave manages to exceed the b-wave’s starting point. Or, to completely retrace the b-wave’s move.
- Flat with c failure. Like the name suggests, the c-wave fails to completely retrace the previous b-wave. When this happens, the market fails, while the b-wave stays the same.
- Elongated flats. These ones have the same c-wave as the previous category. The only difference is that the b-wave retraces more.
Flats with Strong B-Wave
Like the name suggests, these ones have a super long b-wave. In fact, it is so long that completely retraces the previous a-wave.
To put things in perspective, the b-wave retraces between 100% and 123.6%. As you can see, when it comes to Elliott Waves Theory, Fibonacci levels play an important role.
The following types of flats fit here:
- Irregular flat. While the b-wave exceeds 100% retracement, the c-wave does the same: completely retraces the b-wave. You can imagine how frustrating this is for retail traders, as both bulls and bears get stopped.
- Irregular failure. An irregular failure happens when the c-wave fails to completely retrace the b-wave. When this happens, there’s a certain similarity degree between waves a and c. Both in price and/or time.
- Elongated flat. This pattern is similar to the ones explained earlier. The only difference is given by the b-wave’s retracement.
Besides the nine types listed here, there’s one more. A running flat. The price action that follows a running flat is explosive. However, it will make the object of a different article.
Conclusion
The number of flat types tells us how frequent the pattern is. Believe it or not, Elliott identified exact places where they form. Most of the times, they appear as the 2nd wave in an impulsive move. If the flat pattern is a simple correction, the future price action must confirm it.
If the flat is not the entire 2nd wave, then it is just part of it. In this case, the 2nd wave is a complex correction. Whenever there’s a corrective wave, there’s the possibility that the market will form a flat. Understanding how these patterns form is mandatory for the Elliott Waves trader.
Moreover, among corrective waves, flats form most of the times. Not even contracting triangles, the favorite way for a market to consolidate, form that often. As such, this a-b-c sequence is extremely important for a correct count. Its interpretation leads to successfully forecast price levels on the right side of the screen.
