In “Expanding Flat and How to Avoid Its Traps” we examined probably the most common type of flat correction the markets could offer. It is easy to spot and relatively easy to trade. However, if you are constantly expecting the expanding variety, you are not going to be prepared for its exotic, but deceptive cousin – the running flat. An idealized example of its structure is given below.
Just as the expanding flat, the running flat has a three-wave structure, labeled A-B-C. Waves A and B consist of three waves. Wave B travels to a new extreme, exceeding the starting point of wave A of the pattern. And here comes the major difference between the two flat corrections. In an expanding flat, wave C travels beyond the starting point of wave B. Within the running type, it does not. In other words, a running flat wave C is not going to reach the termination point of wave A. When wave C is over, the entire corrective pattern ends and the larger trend resumes. Okay, enough theory, let’s take a look at a real example in GBPUSD.
On the above-shown chart, there is a running flat in the position of wave (B) of a larger (A)-(B)-(C) zig-zag. Wave (A) is a five-wave impulse, indicating that the trend is pointing north. But our focus is on wave (B). As soon as wave (A) ended, the exchange rate declined in three waves, labeled a-b-c for wave A. Wave A was followed by another three-wave sequence – a w-x-y double zig-zag to a new top in wave B. But the bears were not done yet. As soon as wave B came to an end, a five-wave sell-off in wave C occurred. But pay attention to its extend. The selling pressure was not strong enough to exceed the bottom of wave A. The bears ran out of power slightly above it, which is the only difference between expanding and running flats. The entire running flat correction ended with an ending diagonal in wave 5 of C of (B). After that, the uptrend resumed in wave (C) to the upside.
As previously mentioned, the running flat is probably the rarest pattern within the Elliott Wave Principle‘s catalogue. This makes it the most mischievous one as well, because you know it could happen, but you should never rely on that in trading.