Elliott X Waves & Fibonacci Patterns

elliott wave for binaryWhat is an X Wave?

Elliot Waves come in a 5-3 pattern; five impulse waves followed by 3 corrective waves. If the corrective wave has not met the target price, a combination of waves will ensue. An X wave (or connecting wave) happens that connects two or more corrective waves as it also makes three corrective moves to swing the trend back into place. X waves are always corrective waves. The presence of an X wave means there is about to be a complex correction. For instance, a complex correction made up of two zigzags is linked by an X wave. This pattern is the Double Zigzag. Following the same rules you can also have a Triple Zigzag where three corrective zigzags will be connected by X waves. A triple zigzag is the largest sequence possible, so two X waves are the greatest number during any sequence of waves. The ultimate goal is trading a market direction that will make it to the right side of the chart before the time period expires. This is so important, especially in Binary Options where you basically predict whether the price is going up or down during a set time period.

Small X Waves or Large X Waves?

As mentioned earlier, X waves are always corrective waves. There could be small X waves or large X waves; these waves could also be described as weak or strong respectively. Determining if it is a small or large wave depends on the ratio of the retracement or how far it goes back toward the starting point. This is where the Fibonacci Numbers come in. Not only is the Fibonacci sequence based on the summation of the first two numbers to get the third (1-1-2-3-5-8-13-21…) it is also based on ratios. The number divided by the preceding number will yield a number very close to 1.618. In the same manner, a number divided by the next highest number will yield a number close to 0.618. This is where the retracement ratio of 61.8% comes from. It is also referred to as the Golden Ratio. There are three other Fibonacci retracement ratios: 23.6%, 38.2% and 50%. The 23.6% retracement is considered shallow; the 38.2% and 50% are moderate and the Golden retracement, 61.8% is deep.

So, a large or strong X wave is seen when the retracement is greater than or equal to 61.8% of the first corrective wave. Conversely, if it is less than 61.8% of the first corrective wave it is small or weak.

Those trading Binary Options can benefit from the Fibonacci tool because it will help them predict where and when the numbers will hit based on the Elliot Waves and the Fibonacci.

Understanding X waves can be complicated because you don’t really know if it will be weak or strong. All complex corrections have an X wave. Simple corrections have no need for an X wave. Applying the Golden Ration will be a key in helping you know what is going to happen next.

Rules, Tips & Tricks

There are a few tips and tricks that may help you as you begin to look at trending charts and apply your tactical skills.

  • Always refer back to the rules. Each wave or sequence has a set of rules to be followed. Example, X waves are always in a corrective wave. Or, it is mandatory for X waves to never exceed the 61.8% ratio.
  • Know the waves in a cycle: 5-3 pattern; impulse and corrective. It is good to remember that waves 2 and 4 within the first 5 waves are corrective, but are still within the impulse area because wave 2 doesn’t fall below wave one and wave 4 doesn’t fall below wave 3.
  • Know how cycles work
  • Recognize personalities of the cycles: volatile, passive, etc.
  • Know and understand the patterns: zigzag, flat, triangles, etc.
  • It is not just about counting waves. It is a combination of all factors together: counting, cycles, personalities, and patterns. Once you have mastered each individual feature, group them all together to see the bigger picture.
  • The market is always moving in impulsive waves that lead the trends, followed by corrective waves. The impulse waves can be up or down, bullish or bearish.
  • The Elliot Waves Theory is not the best predictor in short time periods under one hour. There isn’t enough time for the subdivision waves to produce the necessary cycles.
  • Have realistic expectations

You need to determine where the previous correction actually ends so that you can correctly calculate the Golden Ratio. Without the proper starting point your calculations can be way off.

One rule of the X wave is that it should not end beyond the Golden Ratio. Parts of the X wave can exceed the Golden Ratio but the end point needs to be equal to or less than 61.8% of the previous ending point.

Identifying the X wave will help you know if you should be trading the highs or the lows.

Conclusion

The X wave and Fibonacci go hand in hand by nature of the Golden Ratio found within the Fibonacci. The retracement of the X wave to the Golden Ratio tells you a strong correction is underway. By not reaching the Golden Ratio, a weak correction will take place. As you can see, a solid understanding of Fibonacci and X waves is critical when analyzing market trends.

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