Have you ever observed that a large price movement often follows a diagonal pattern on a chart? That is why being able to identify these patterns is essential for traders. Both the motive waves 1 and 5, as well as corrective waves A and C, exhibit diagonal patterns, whether leading or ending.
What are Diagonals?
In the context of financial markets and technical analysis, the term Diagonal patterns usually refers to price chart patterns, particularly in Elliott Wave Theory. Diagonals are defined by converging trendlines that go upward or downward, forming a unique wedge-like or triangular shape.
There are two primary types of diagonals: 1. Leading Diagonal and 2. Ending Diagonal.
What is the Leading Diagonal and Ending Diagonal?
1. Leading Diagonal Pattern
Early on in a price trend, a wave pattern known as a leading diagonal pattern will develop, indicating the beginning of a new move. When the five waves combine, they form a distinctive wedge shape; some of the waves are motive waves that advance the trend, while the others are corrective waves.
These patterns frequently appear in wave 1 of an Elliott Wave series or even during corrective waves such as wave A, providing traders with an early indication of a possible lengthy price movement ahead.
Typically, when a leading diagonal develops, the upper and lower trendlines begin to diverge and eventually grow more widely apart. A leading diagonal is important because it signals the start of a new price trend.
2. Ending Diagonal Pattern
A final wave pattern, also known as an ending diagonal pattern, indicates that the market is about to suffer a reversal. The five waves that make it up—two corrective waves and three motive waves—come together to form a wedge.
An Elliott Wave series typically features ending diagonals in wave 5 or C, signaling the end of a price trend. These patterns enable traders to anticipate large price swings by serving as crucial indications of upcoming trend reversals.
The most obvious sign of an ending diagonal is the steady convergence of the upper and lower trendlines, which forms a wedge-like pattern. When these trendlines get closer, it means the current trend is losing steam, which usually means a big reversal is on the horizon until the pattern ends.
Leading Diagonal Rules
- In a leading diagonal, Wave 2 should never cross the starting point of Wave 1 or drop below the 0 level.
- Out of all three waves—1, 3, and 5—Wave 3 can never be the shortest. Wave 3 is usually the most powerful move in the structure, and this rule ensures that the pattern’s impulse continues to be strong.
Leading Diagonal
- Wave 4 must start before the beginning of Wave 2.
- The structure of a leading diagonal is characterized by a 5-3-5-3-5 pattern, with three smaller corrective waves forming Waves 2 and 4, and smaller 5-wave impulsive patterns making up Waves 1, 3, and 5.
- The leading diagonal resembles a gramophone.
Note
- The pattern can only be found in wave 1 or A in the case of Zig-Zag correction
- After examining the diagonal trend, it is anticipated that the previous trend will eventually end in the long term
Ending Diagonal Rules
- Wave 2 never cross the starting point of Wave 1
- Wave 3 is typically the longest wave in Waves 1, 3, and 5, but not the shortest wave in both waves
- Wave 4 must begin before the beginning of wave 2
Ending Diagonal
- The Ending Diagonal has three smaller waves within each wave, with Waves 1, 2, 3, 4, and 5 each having a smaller three-wave structure(Structure 3-3-3-3-3)
Note
- The ending diagonal pattern is a pattern that appears in the final stage of a trend, typically in wave 5 or wave C
- The pattern appears in the ending stage, indicating an expected trend reversal
Leading Diagonal vs Ending Diagonal
| Leading Diagonal | Ending Diagonal | |
|---|---|---|
| Timing | A new trend begins | Appear near trend end |
| Structure | Divided into three motive waves and two corrective waves(5,3,5,3,5) | The structure consists of five waves, each with a different internal structure (3, 3, 3, 3). |
| Wave Direction | Trend reversal | Align with the overall trend |
| Implication | Indicate the early stages of a new trend | Indicate an upcoming trend reversal |
| Pattern | Diverge and eventually grow more widely apart | Upper and lower trendlines are convergent, forming a wedge pattern |
Leading and Ending Diagonal Trading Strategy
Step 1. Recognition
- Analyze price charts thoroughly to find possible diagonal patterns.
- Differentiate between Leading Diagonals and Ending Diagonals based on their structures and placements within the larger trend.
Step 2. Confirming Diagonal Structure
- Confirm the diagonal pattern’s structure by confirming it follows the Elliott Wave Theory guidelines.
- Check if the internal waves match the typical five-wave structure of diagonals.
Step 3. Trend Confirmation
- Confirm the market’s current trend. Leading diagonals are frequently seen at the start of a trend, whereas ending diagonals indicate probable trend reversals.
Step 4. Entry Points
- For Leading Diagonals: After the leading diagonal, a slight retracement or correction is to be expected. When the motive wave is confirmed, entry can be made.
Leading Diagonal
- For Ending Diagonals: Make careful to finish all five sub-waves of the concluding diagonal. The entry can then be made only after the reversal is confirmed on the price chart.
Ending Diagonal
- Last Minute Preparation: Before you enter, consider whether the sub-wave one appears in the lower degree! If sub-wave 1 cannot be recognized, there will be no entry. When the price crosses wave 1, it is a simple entry.
Step 5. Risk Management
- Be sure to place the stop-loss at the beginning of the leading diagonal and at the end of the ending diagonal.
Step 6. Target Levels
- A simple target is that sub-wave 3 can go to 161 percent of the ratio of sub-wave 1.
Step 7. Confirmation Indicators
Utilize additional technical indicators or oscillators to confirm diagonal pattern signals and observe divergence or convergence between price and indicators for additional confirmation.
Final thoughts
This guide aims to help traders identify and trade leading and ending diagonal patterns, which are crucial for navigating financial markets. It covers Elliott Wave Theory and the unique characteristics of each diagonal type. Successful trading requires technical analysis, risk management, and adaptability.
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FAQs
Can wave 3 be diagonal?
Elliott Wave Theory suggests that Wave 3 is an impulse wave, characterized by swift price movement in the direction of the trend. Although diagonal structures are not common, It is typically seen in the strongest and longest wave within the five-wave impulse sequence.
Is ending diagonal bullish?
Ending diagonals, also known as terminal diagonals or wedges, can be bullish or bearish, depending on their context. Bullish diagonals form at the end of a downtrend or corrective pattern, consisting of five waves labeled A, B, C, D, and E. These waves typically move in the direction of the overall trend, suggesting a near-completed downtrend and potential bullish reversal. Conversely, bearish diagonals form at the end of an uptrend or impulsive move, suggesting an approaching exhaustion of the uptrend and potential bearish reversal.
Disclaimer
This article is provided for informational purposes only and does not offer financial advice. Trading and investing involve risk, and past performance is not a guarantee of future outcomes. Before making investment decisions, readers should conduct their own research and consider their individual circumstances. The author and platform are not responsible for any financial losses or damages resulting from the use of this information. Get personalized advice from a trained financial counselor.
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