Technical learnings: Types of correction (Irregular and flat)

Correction Patterns:

So what are corrections or corrective moves? Basically in simple words the correction is a movement in stock price which joins two impulses or trending moves. As the name suggests a correction is just  a temporary phenomenon and when they are over a trending move begins.

A corrective move is found between two impulses i.e. when a trend ends corrective move begins and similarly when a corrective move ends a new trend begins. Every impulse has five legs i.e. 12345 & leg 2 & 4 in each impulse are corrective moves or correction patterns. They are usually smaller price wise but bigger time wise than trending moves (1,3&5). They often presents a directionless trade and spend too much time doing nothing. Which makes them harder to trade.

Once markets have taken a big trending move it needs time to digest those move, corrective pattern help market digest previous move.

Below are the main Corrective moves or Correction pattern which can be found. 


Corrective Patterns



1. A-B-C simple zigzag : Simple zigzag is most simple and common pattern found . They usually found in wave 2 of an impulse. in such corrections wave A & C tends to be equal though sometimes wave C can stretch to 161.8% of wave A

2. A-B-C Flat corrective: Its similar to zigzag only thing is all the legs in such patterns tends to be equal. So entire correction is like a channeled move.

3. A-B-C Irregular correction: Irregular corrections are most confusing of the lot and are very common too ( they are also called expanded flat). In such corrections wave B will always cross start point of wave A, giving an impression that correction is over however just when everyone goes long prices turn down and C leg turns lower than end point of wave A which gives the impression as if a new trending move has started on the downside. However as soon as the wave C ends, the prices turns in opposite direction and the reversal is usually very fast and sharp, catching everyone with surprise. Irregular corrections when identified can be an excellent trading opportunities however its almost impossible to identify them in advance. But they can be identified when they are nearing completion or already completed.

Technical learnings: Thrust out of a Triangle

Limiting and Non limiting Triangles

 Now that we have covered most of the common forming triangles in my previous posts, the next question is how do we predict Market movement ( or set the target) once the Triangle is complete? To answer this question we need to carefully observe the triangle and try to find out if the Triangle is completing as " Limiting triangle" or "Non limiting triangle". Yes most triangle can further be categorized as Limiting or Non limiting. Thrust or move out of a triangle ( or target) is totally dependent on this.

To identify if the triangle in question is Limiting or non limiting one should look at the 'Apex Point' ( Apex Point is where both A-C and B-D line of the triangle meets). If the apex point is very near to E leg (meaning there is congestion near apex point) then its a non limiting triangle and if there is no congestion and apex point is far from end point ( i.e. E leg) then triangle is Limiting triangle

To make things more clear, lets have a look at below example



Limiting and Non limiting Triangles

Limiting Triangles:

• Like mentioned above, if the Apex point is far away ( general rule is total distance between E leg and Apex point should not be less than 20% of entire triangle). 
• Once the E leg is over you may take a trading position
• Trading target will be 75% to 125% of largest leg of the triangle

Non Limiting Triangle:

• Like mentioned above, in such triangles the apex point is very near to end point of triangle ( too much congestion near Apex point)
• Once the E leg is over, price action breaks in opposite direction
• But as the name suggests non limiting triangle has no specific range or target area and the thrust area out of it is 'non limited'
• Non Limiting triangles generally gives false break out and trend resumes in main direction pretty soon. In other words the movement which follows non limiting triangle may not last for long

Technical Learning:Extracting Triangles

Extracting Triangle: Extracting triangles are very important pattern, they do not occur very frequently and even the price action which follows once the pattern is complete is not very sharp.
Like all triangles they too have 5 legs can be found in both Bullish and Bearish markets.



Extracting Triangles

Important characteristics

As the name suggests, extracting triangle 'extracts' the power of bulls and bears ( depending on what type of triangle it is). This pattern causes 'fatigue' among players and is a 'tiring' pattern. In case of Bearish pattern as you can see Bulls are trying to take market higher but are failing with each attempt. Each direction leg ( i.e up leg) is getting smaller and smaller meaning Bulls are losing their strength, however each falling leg is getting bigger meaning Bears are getting stronger. Once the E leg is done and inspite of all their efforts Bulls realizes that they have failed to take market to new highs, they give up and that's when Bears take over and market goes for a downtrend which can be quite extended at times. Bullish triangles works just the opposite of what we  just discussed. Here Bears keep getting weaker and Bulls keep getting stronger and after E leg is done you see a fresh uptrend


 

Technical Learning: Contracting, Ending Diagonals and Expanding Triangles

To continue with triangles, let me cover 3 types of triangles today. Contracting , ending diagonals or wedges and Expanding. Like all patterns, these too can be found in both Bull and Bear market. Bullish or bearish pattern is determined by direction in which prices are expected to move once the pattern is complete. In the below examples the prices are expected to reverse downwards hence these are 'bearish triangles' ( even though the prices in the pattern itself may be moving up). The shape of these triangles in bullish will be exact opposite i.e. 'A' leg will be pointing downwards.





Contracting, ending diagonals and expanding triangles

Important characteristics

Contracting triangles:

1. 'A' leg defines the overall range of pattern and is the biggest leg and rest of the legs are formed within same range
2. Each subsequent leg is smaller than the previous leg and the overall pattern forms a compressed or contracting structure (compressing price action just like a spring)
3. When the pattern is complete, the compression of prices stops (its unsprings) and gives a violent thrust
4. Prices move very fast once the pattern is complete
5. Buy/sell is recommended once the price breaches B-D support line ( line joining B and D leg of the  of triangle)

Wedges/ending diagonal:

1. Similar to contracting triangles only difference is that C leg though smaller than A leg, makes a new high.
2. 'D' leg is smaller than B and must finish above 'B' end point.
3. 'E' leg may or may not cross C but it should remain smaller than 'C'
4. Again, buy/sell is recommended once the price breaches B-D support line

 Expanding Triangle:

1. Most confusing of the lot as prices keep on expanding and making newer higher and newer low with every move
2. E leg is the largest and can be as much as 261.8% of C leg making it difficult to predict the end point
3. Price action that follows upon completion of triangle is very slow ( making it even harder to trade)
4. For entry point, either wait for  E leg to touch A-C line and reverse from there or if it crosses A-C line and enter below it again then buy/sell.
5. Though its not mentioned in the chart above, E leg can sometimes be smaller than D leg. In such cases wait for prices to go below D leg before initiating buy/sell

I know this can sound fairly complicated but trust me its not that difficult once you start recognizing patterns.






 

Technical Learnings: 7 legged Diametric patterns

I was hoping to cover all triangles first before I move on to 'Diametric' but since in todays post mentioned the possibility of Markets making a 'Diametric pattern', let me explain it today itself.

Diametrics are corrective  patterns and once they are complete the price tends to move sharply in opposite direction ( similar to triangles). But unlike triangles Diametrics have 7 legs and are extremely difficult to trade. Difficulty arises from the price movement. Just when you think a new high is formed price will start moving down and just when you think you have a new low price will again start moving up and to complicate matter further, Diametrics have 2 shapes and its very difficult to identify them till they are almost on the verge of completion.




7 legged Diametric Pattern

Point to note:

 

1. Diametrics have two types: A) Bow type i.e. contracting first and expanding later and B) Diamond shaped i.e, expanding first and contracting later.
2. Price move in opposite direction once pattern is complete and its usually very fast
3. Price action that follows after diamond type completion is usually faster than bow types ( so diamond type are more bullish/bearish)
4. In case of Bow type the G leg can cross or end below E leg. if it ends below E leg or in other words fail to cross high of E leg then its called as 'G failure'
5. If G leg does end as a failure then the price action which follows is very very sharp. sometimes its so sharp that it doesn't even allow traders to enter into a trading position
6. Both these patterns can also be read as 'double corrective' i.e, ABC-X-ABC ( however I prefer to read them as one)
7. Diametrics basically signal confusion which is there in the markets which is explained by overlapping price movements and once the confusion is cleared i.e. diametric is complete, what follows is a clear trend
8. And like all patterns diametric too can be found in both Bull and Bear markets. Above example is a Bear market example ( since prices are expected to move down once G leg is complete)
9. Time action between most legs can be similar (i.e. all or most legs might last for same number of days)

 

 

 

 

 

 

 

 

Technical Learnings: Neutral Triangles

Triangles are most commonly occurring technical patterns yet they are neglected the most. Its relatively easier to detect triangle pattern and usually they appear during the last leg ( 5th wave). Waves are usually overlapping and thrust/movement once the triangle pattern is complete is usually unidirectional and one sided thus making it easier to trade.

Neutral Triangle




Neutral Triangles

Just like all triangles Neutral Triangles has five legs too ( just like an normal impulse) but below are some of the important things to note.

• The most important characteristic of neutral triangle is that wave 'C' is the longest among directional wave ( i.e. wave A C & E) 
• Wave 'D' is always bigger than wave 'B'
• Wave 'D' may or may not surpass end point of  'B' (in the above example its surpassing but its not mandatory)
• Wave 'E' can be longer or shorter than wave 'A' (usually similar to  wave 'A' in terms of price and time)
• Once the Wave 'E' is retraced (in faster time) it can be assumed that trend has changed and long/short position can be taken with  a SL at end point of D wave (or beginning of E)

Basics of Markets: Technical Patterns

I will use this space to explain various basics technical patterns, which every trader should know. Will try to post one technical pattern at a time (whenever I get time) and explain how it works.

 Every technical pattern may not always turn out to be what you expect but when it does it can surely help make you lots of money. Trading is a game of possibilities and you continuously need to scan market movement for various possibilities that may be present.