1. Every manifest indicator (box) or latent construct (big circle) that has an incoming unidirectional "causal" arrow gets a residual (or error) term (small circle).
2. Every manifest indicator and latent construct (like any ordinary variable) gets a variance. If the indicator or construct has no incoming unidirectional arrow, its variance is located in the indicator or construct itself. However, if something has a residual, the variance is located only in the residual.
3. Non-directional, "curved" correlations can be inserted only between two entities that have variances. Thus, if two entities each have residual variances, it is the residual variances that get correlated, not the indicators or constructs themselves.
