How to Identify and Trade Leading and Ending Diagonal Patterns

Have you ever seen Diagonal price patterns? After a Diagonal is established, a lengthy price movement is observed. The same thing can be seen in both circumstances, whether the Diagonal is Leading or Ending. How can we recognize this long price run after the Diagonal is formed? One of the most prominent patterns in Elliott Wave Theory’s Motive Phase is the diagonal. Once you’ve identified this pattern, you’ll be able to effortlessly capture long price runs. This post attempted to look at how to identify and trade Leading and Ending Diagonal Patterns from several angles.

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

Leading diagonals are wave patterns in early price trends, consisting of five waves divided into smaller motive waves and corrective waves. They converge as the pattern progresses, creating a wedge-like shape. These patterns are typically found in the first wave of an Elliott Wave sequence.

2. Ending Diagonal Pattern

Ending diagonals, consisting of five waves, are terminal patterns that indicate a market reversal. They consist of three motive waves and two corrective waves, forming a wedge shape. These patterns are often seen at the end of a price trend and often precede significant trend reversals.

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Leading Diagonal Rules

• Wave 2 does not fall below 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
• Waves 1, 3, and 5 are divided into smaller 5-wave patterns, while waves 2 and 4 are subdivided into three smaller correction waves(Structure 5-3-5-3-5)
• 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 does not fall below 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

• 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

How do You Identify Motive Waves?

Leading Diagonal vs Ending Diagonal

Elliott Wave Theory distinguishes leading diagonals and ending diagonals, both with wedge-like structures, but differ in their roles in the market and internal wave structures.

Leading Diagonal

1. Timing: Leading diagonals are typically observed at the start of a new trend, often as the initial wave of an Elliott Wave sequence.

2. Structure: The leading diagonal consists of five waves, which are further divided into three smaller motive waves (numbered 1, 3, and 5) and two corrective waves (numbered 2 and 4).

3. Wave Direction: The internal waves within a leading diagonal typically align with the overall trend, resulting in a converging pattern.

4. Implication: Leading diagonals indicate the early stages of a new trend in a market, often followed by corrective patterns.

Ending Diagonal

1. Timing: Ending diagonals, which usually appear near the end of a price trend, indicate a potential market reversal.

2. Structure: Ending diagonals, like leading diagonals, consist of five waves but have a different internal structure, consisting of three motive waves and two corrective waves.

3. Wave Direction: The internal waves within an ending diagonal typically align with the overall trend, forming a wedge shape as the waves progress.

4. Implication: Ending diagonals are terminal patterns that indicate a near-exhaustion of the current trend, with a potential for a reversal.

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.

• 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.

• 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.

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Final thoughts