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Ralph Elliott put together the basis of the Elliott Waves Theory back in the 1930’s. He was so convinced that he found the “secret of the universe”, and as a result, his findings still attract traders to financial markets almost a hundred years later.

Forex trading differs entirely from the stock market trading happening around the 1930’s. The products aren’t the same, the liquidity as well, not to mention the market’s volatility and velocity.

Yet, the theory claims to account for both pessimism and optimism via interpreting different market cycles. Based on the action and reaction principle, a cycle described by the Elliott Theory contains an impulsive and corrective wave.

While impulsive waves are more popular among traders as the market moves faster in this part of a cycle, the market spends most of the time in corrective, not impulsive waves. That is true in Forex trading too, even though it is one of the most volatile markets.

Think of the NFP (Non-Farm Payrolls) weeks, when the release comes out on Friday, and market participants don’t take chances until the labor data comes out.

Or, like the week this article is written, with both FOMC (Federal Open Market Committee) and ECB (European Central Bank) statements and press conferences due on Wednesday and Thursday, during the London and New York sessions respectively. What did the market do?

Nothing! It opened on Monday and then ranged on the hourly timeframe to end up at the same level ahead of the Fed release. Hence, a corrective wave formed in this timeframe.

However, on lower timeframes like the five-minute chart, the red candles on the hourly may be impulsive waves, but of a lower degree. The point here is that in Forex trading the market always spends time both in corrective and impulsive waves, only on cycles of different degrees.

The Concept of a Running Correction

Corrective structures appear even in impulsive waves. We know by now from the previous articles that an impulsive wave is a five-wave structure labeled with numbers: 1-2-3-4-5.

But even when a market advances or declines with an impulsive structure, there are still two corrective waves: the 2^nd wave corrects the 1^st one, and the 4^th wave corrects the 3^rd one.

This happens in the first part of the cycle. The second part of it is a corrective wave on its own, an a-b-c that corrects the entire 1-2-3-4-5.

An Elliott Wave cycle’s interpretation looks like this:

The standard explanation of such a move or a cycle is that what ends at the 5^th wave is the end of the first wave of a bigger degree. And, naturally, the 2^nd wave of the same degree ends where the c-wave ends.

In other words, the Elliott Waves analysis would look like below:

Most of the traders would want to remain on the long side as the 3^rd wave tends to extend. What they do is measure the length of the 1^st wave and project 161.8% of it from the end of the 2^nd wave in red. That’s the minimum distance the price should travel in the case of a 3^rd wave extension impulsive wave.

However, more and more often in Forex trading, the market tends to form running corrections. The correction we see in the chart above is a classic one, with the a-b-c in black ending the 2^nd wave in red, right in the 1^st wave’s territory.

While this does happen most of the time, in some cases, the market “runs.” Is it possible for the 2^nd wave to end somewhere else? The answer is yes.

Moreover, is it possible for the 2^nd wave to NOT end in the territory of the previous 1^st wave? The answer, again, is yes.

Is it even conceivable that the 2^nd wave will end ABOVE (in a bullish trend) the end of the 1^st wave or BELOW (in a bearish trend) the end of it? Again, yes it is.

Furthermore, this is a characteristic in today’s Forex trading price action, so understanding the running concept helps traders ride the waves using the Elliott Theory.

Large X-Waves in Forex Trading

The secret of a running correction comes from an intervening wave. Because of this corrective wave that connects two simple corrections, traders tend to misinterpret it with the third wave of an impulsive wave.

In previous articles, we’ve covered the concept of a complex correction and how it can have either one or two x-waves.

However, most of those corrections had a small x-wave, which barely retraced less than 61.8% of the first correction. As a rule of thumb, all complex corrections with a small x-wave end into the territory of the previous wave. Therefore, not possible for traders to find a “running” effect on them.

Corrections with a large x-wave, however, see it retracing much more than 61.8% when compared with the length of the first correction. As a matter of fact, to ensure the “running” effect, the large x-waves retrace much more than 100%, even 161.8%, 261.8% or even more.

What follows is just another consolidation after the x-wave ends. Typically, the x-wave is either a zigzag or a zigzag family pattern (double or triple zigzag), and the second part of the correction is generally a triangle.

The typical running correction with most appearances in Forex trading is called a double three running, and if we are to use the previous example, the market will need to form the following pattern, for it to be a double three running correction for the 2^nd wave:

The chart above shows the possible interpretation of a running correction for the 2^nd wave of an impulsive move. Called a double-three running, it has two simple corrections (a flat and a triangle), connected by a large x-wave.

The beauty of a running correction is that it misleads so many traders. Because of the standard interpretation, most traders will exit the long trade by the time the price reaches the original 161.8% extension.

Instead, that’s only the beginning of the 3^rd wave, and the 161.8% extension starts there. It shows why running corrections are followed by an explosive move by the time they end, as most traders are simply taken by surprise.

Conclusion

Running corrections often appear in Forex trading. They appear so often that most of the time savvy traders ignore classic corrections.

Because the price action that follows a running correction is an explosive one, that is the wave most of the traders want to be in, as the market moves fast.

Running corrections appear mostly as the second waves in impulsive moves, and the 3^rd wave that follows experiences a rapid development due to the fact that most shorts are stopped out fast.

Also, they can appear as the b-wave of a zigzag, when the zigzag is an elongated pattern. More about elongated patterns in the following article of this trading academy.

What matters here is to keep in mind that running corrections do exist, and in Forex trading they form quite often. Moreover, the running concept is one of the most difficult to comprehend, mainly if you don’t keep an open mind as Elliott would have wanted you to.