The most difficult pattern to trade with the Elliott Waves theory is a flat pattern. There are multiple types of flat patterns, no less than ten types, and the purpose of this article is to list the most important ones and what makes the difference between them. Before doing that, a short introduction to the pattern is needed.
Flats are corrective waves, labeled with letters, a-b-c, and the first two waves are corrective with the c-wave being impulsive. No matter if trading commodities or currency pairs, the structure of a flat is the same.
Here are the most important types of a flat and what their interpretation should be:
- An irregular flat is characterized by tripping stops for both bulls and bears. In such a pattern, the b-wave is longer thanthe a-wave (as such, it travels beyond the start of the a-wave, tripping those stops) and the c-wave retraces completely the whole b-wave. Therefore, all stops are triggered and traders don’t know Irregular flatwhere the market will go next. Such a flat appears as the second wave in an impulsive move or as a leg of a contracting triangle.
- Common flat. Such a flat is characterized by the b-wave retracing the previous a-wave almost entirely. The minimum distance for the b-wave to travel is 80%, but most of the times it goes to one hundred percent. In any type of flat, it is important to note that the end of the b-wave matters, not the highest or lowest point in the wave. Therefore, the market may travel beyond the one hundred percent retracement level, but if that is not the end of the b-wave, it doesn’t matter. As a side note, if one compares the three waves that make the common flat, the b-wave (the wave in the middle) is usually the most time consuming one. It can appear as an x-wave in a complex correction or as the 2nd wave in an impulsive move.
- Irregular failure. The flat with an irregular failure is showing a strong trend in the opposite direction. In other words, it should be faded. Depending on the time frame that appears, fading it can be an expensive move. If it appears on the daily or weekly chart, it is no fun going in the other direction. The a-wave of such a flat is a corrective wave, of course, like all the a-waves in flat patterns. The b-wave is a strong one, in the sense that it retraces beyond the 100% level. In most of the cases, it retraces beyond the 161.8% when compared with the length of the previous wave a. What traders do is they take a Fibonacci extension or retracement tool, set the 161.8% level and project it from the moment the flat started. That is the minimum level the b-wave in an irregular failure travels. The funny part is that the impulsive move that follows, or the c-wave, is not even able to completely retrace the b-wave. Nevertheless, it goes into the territory of the a-wave. Such a flat appears as the last leg of a contracting triangle or as the 4th or 2nd wave in an impulsive move.
Other types of flats are flats with double failure, C failure, B failure, and elongated flats. Between these, the elongated flats are interesting because they suggest a triangle of a bigger degree is forming. They can be either the whole leg of the contracting triangle or just part of that leg of a triangle.
Elongated flats are a way to forecast future price levels and their main characteristic is that the c-wave is super-long when compared with the other a and b-waves. To be more exact, an elongated flat has the c-wave bigger than 161.8% when compared with the length of the previous b-wave. So powerful is the impulsive wave, that traders live under the impression that nothing can stop it anymore.