If you think that corrections are movements against the larger trend, you are absolutely right. But if this is true, why should you expect from a correction to make a new bottom in a downtrend or a new top in an uptrend then? Because sometimes the power behind the trend is so much, that its inertia forces the retracement to a new extreme. When that happens, the correction, which is forming, is probably an expanding flat.
Elliott called this type of flat “irregular”, but in fact it is very common. The Expanding flat consists of three waves labeled A-B-C, structured 3-3-5. Three waves for A, three waves for B and five waves for C. Because of its shape, each wave in the expanding flat is longer than the previous one in terms of price – B is longer than A, C is longer than B. We will use the two charts below to illustrate how an expanding flat looks like in real-life conditions.
On this chart of EUR/USD you can see an expanding flat in the position of wave (B). In this case the larger trend is down, since wave (A) is impulsive. After the end of the whole expanding flat correction at 1.3740, it was time for the downtrend to resume in wave (C). If you are a “breakout trader”, there are two points of danger, when this type of correction is developing. The first one is when wave B of the flat makes a new extreme – top or bottom. If a trade is initiated there, the result of it will soon go negative. The same is valid for point of danger number two – when wave C makes a new extreme above wave A. In this example, breakout traders would see it as a bullish signal. Fortunately, the Elliott Wave Principle would save us some money there. On the next chart of USD/JPY you can examine an expanding flat in an uptrend.
Recommended reading: Elliott Wave Patterns
Five waves in wave (1), it was natural to expect some kind of a pull-back in wave (2). A small wave A, larger B wave and an even larger wave C formed a perfectly looking expanding flat in USD/JPY in November 2013. If you have been following this pair, you probably know that it went some 800 pips to the north after this.
As a conclusion, you can hardly predict an expanding flat, but once it is finished it is easily recognizable and could provide great opportunities. People tend to become very emotional during C-waves. Emotions and trading are not the best partners. So knowing the pattern allows you to step out from the crowd and form your own opinion and trading decision.
