Talk about the importance of patterns and correlation with EWT.
What is an Impulse Wave?
An impulse wave is pattern when price moves swiftly towards its cycle target. Impulse waves are found within cycles when waves extend. Within an impulse sequence wave 3 tends to reach beyond 161.8% of wave 1 and the wave 4 never overlaps with the peak of wave 1. Impulse waves generally form within the parameters of the extension cycle and is a strong signal for technical analysis. (See EWT Rules Section)
Diagonals are a commonly found pattern and considered very reliable when calculated within the parameters of a diagonal. Traders often refer to diagonals as a falling or rising wedge pattern. Understanding when and where these patterns print along with their parameters can offer trade opportunities and a larger perspective on near-mid term price paths.
There are two types of diagonal structures. One that is corrective (3,3,3,3,3), and one that is impulsive (5,3,5,3,5). Either version can show up in corrective and impulsive conditions.
The Zig Zag corrective pattern is a 5,3,5 move and one of the most commonly found patterns in stock charts. Zig Zags are powerful patterns that print on all time/price frames and offers a lot of important data for traders. Whether scalping, swinging, or looking for a longer trade, zig zags usually offer insight to one or all three types of trading opportunities.
Zig Zags are typically composed of 5 waves for "A", 3 swings for "B", & 5 waves for "C". The most common target for wave "C" is 100% the length of wave "A" from "B". Wave A & C must be 5 waves, wave B can be any corrective structure (i.e. zig zag, triangle, or combination). 100%-161.8% the length of A for C is the general target for corrective zig zags but can sometimes extend to the 261.8% extension.
Flats are a 3,3,5 structure correction common in sideways markets and one sided trends. Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B generally retraces most of wave A. Target for wave C is generally 100% the length of wave A but can also be 61.8% or 123.6%. Wave C in flat corrections should not reach 161.8%.
Expanded flats are 3,3,5 structure are sometimes found in tricky corrections during strong bullish or bearish trends. Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B ends 100%+ the length of A, typically 123.6% but never more than 140%. Wave C ends 100%-161.8% the length of wave A.
Running flats are similar to but rarer than expanded flats. When this pattern does print, it's usually a wave 2 leading into a strong wave 3 (hence the short wave C). Waves A & B can be any 3 swing corrective structure, wave C must be 5 waves. Wave B ends 100%+ the length of A, typically 123.6% but never more than 140%. Wave C ends 61.8%-100% the length of wave A.
Triangles are a consolidating 3,3,3,3,3 configuration and can only be found in wave 4 and wave B structures. Identifying triangles can offer near term trade opportunities along with a greater perspective of the parent pattern whether it be part of a corrective (wave B) structure or part of an impulsive (wave 4) structure.
Corrections often connect 2 or more corrective patterns together. When this happens it is labelled WXY.
WXY Patterns may print when there is uncertainty in the marketplace and/or when specific retracement levels have not been met.