How to Identify and Trade Leading and Ending Diagonal Patterns

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
Leading Diagonal
Leading Diagonal
  • 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
Ending Diagonal
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

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.
Leading Diagonal
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
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.

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Frequently Asked Questions(FAQs)

1. 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.

2. 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.

3. What happens after ending diagonal?

An ending diagonal is a pattern that signals exhaustion in a trend, often leading to a significant trend reversal in the opposite direction. Traders use technical analysis tools like support and resistance levels, Fibonacci retracements, and other indicators to confirm the diagonal’s end and identify potential entry points for trades in the new trend direction. It’s crucial to remain vigilant for price confirmation and be prepared for increased volatility associated with trend reversals.

 

Conclusion

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. The guide encourages sharing experiences, questions, and perspectives in the comments section to enrich the trading community and foster discussions that contribute to collective learning. The goal is to build a community where traders can learn from each other’s experiences and thrive in the dynamic world of financial markets.

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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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