Corrections and Fibonacci levels

8 min read · Zigzag, flat, triangle. Where to look for the end of a pullback and the target of a wave.

Level:

Short version for experts: tables, lists and screenshots only.

Words in this lesson (10)

Stop — A price chosen in advance at which the trade is closed at a loss, so the loss doesn't grow bigger.

Opportunity (arbitrage pair) — A pair of trades in arbitrage: where we buy and where we sell.

Candle — A bar on the chart for one stretch of time: where the price opened, where it closed, its high and its low.

Level — A price where the market has already turned before. Support is below the price, resistance is above it.

Breakout — The price has gone through a level and held beyond it.

False breakout — The price went past a level, couldn't hold and came back. Those who entered on the breakout ended up in a loss.

Trend — A steady direction of the price: every new high and low is above the previous one — a rise; below — a fall.

Correction (pullback) — A temporary move against the main direction.

Screener — A filtering program: it scans hundreds of stocks or coins and shows only those that match the given criteria.

Impulse — A fast, strong price move in one direction.

Three kinds of correction

A correction is a move against the trend. It's more complex than an impulse, and it's where people lose the most money. There are three kinds.

BTC, 4 hours: wave count, targets and the level that cancels the scenario

Zigzag (5-3-5) — a sharp pullback of three waves A-B-C.

Wave B doesn't go beyond the start of wave A.
Wave C goes beyond the end of wave A.
Wave C is usually equal to wave A or slightly longer.

Flat correction (3-3-5) — a sideways one.

Wave B returns to the start of wave A or goes beyond it — producing a false breakout.
Then wave C takes the price back, often beyond the end of A.

Triangle (3-3-3-3-3) — five converging waves A-B-C-D-E.

It occurs only in wave 4, in wave B, or as a connector — that is, before the final move.

The "irregular" correction — a favorite trap

A flat correction in which wave B made a new extreme is called expanded or "irregular". On the chart it looks like this: the price broke the high, the crowd bought the breakout — and the price dropped sharply in wave C, collecting the stops.

This is exactly the pattern the "Waves" screener in MAMAY looks for. The entry comes after wave C is complete and the line drawn through the peaks of its second and fourth subwaves is broken.

After sharp comes drawn out

A practical observation: after a sharp zigzag, expect a complex, drawn-out correction, and vice versa. If the market pulled back quickly and you're expecting an instant continuation, most likely you'll have to sit through a range.

Fibonacci levels

A Fibonacci grid shows where waves most often end. It's drawn only from the true start and end of a wave.

Where a pullback ends (as a share of the previous move):

Wave	Typical depth
Wave 2	50% or 61.8% (sometimes 78.6%)
Wave 4	38.2% or 50%
A deep correction	61.8%
A flat correction	38.2%

Where the target is (from the length of wave 1, projected from the end of wave 2):

Wave	Typical target
Wave 3	161.8%, 200% or 261.8%
Wave C	100% (equal to A), 127.2% or 161.8%

Cluster

One level is a weak hint. A strong one is when two or three levels from different drawings land in the same place. That's a cluster. That's where you look for a reversal, waiting for confirmation: a divergence on an indicator or a reversal candle.

Confirmation by indicator

The highest peak of the indicator (AO or MACD) is usually wave 3.
In wave 5 the price makes a new high, but the indicator doesn't. That's a divergence: the move is running out of steam.

▶ Next lesson: waves in MAMAY