The Impulsive Wave
The Elliot Waves Theory is best known for the impulsive wave. Many trading strategies and theories are available to traders nowadays, yet it is up to the trader to pick the right one in the right moment. As far as binary options are concerned, all traders must have heard about the impulsive wave or come across it during their trading career, given that Elliot’s impulsive wave is quite popular for its profitability if it is respected how it should be.
The impulsive move or wave refers to the five-wave pattern with one extended wave at least which should be the longest among the five. In comparison to second longest wave, the longest wave should be 61.8% which basically defines the wave. If this condition is not fulfilled, it no longer is an impulsive wave.
Impulsive Waves Recognition
In order to make use of an impulsive move, one should know how to discover it on the chart. Traders should know that according to statistics the third wave is usually the longest or extended one which further indicates aggressive price movement when it happens. Traders know that that is the most lucrative trading period where big profits can be secured, so they try to participate.
We have already said that there are five waves, and each wave should be marked with a letter. What is crucial in this situation is to place call options if there is an upward trend before the third wave or during the third wave throughout the fourth wave. Of course, if you see a downtrend, you will buy put options according to the same principle.
The impulsive move is the moment every trader is waiting for since it is the time when the market is moving the fastest, and quick trading decisions can bring quick profits. Even if this is the most exciting period in the market, the timeframe should not be neglected; it always remains an integral part of trading.
Are There Any Issues with Impulsive Moves?
If we have an impulsive move forming on a daily chart, the market will take on corrections after the third or longest wave, which means that things could go the opposite way from then on. Correction can possibly trigger a move in the other direction. Since we are talking about a daily chart here, it could easily happen that our trades run out of money and expire if we selected a short expiry period.
Again, an impulsive move is always characterized by the five waves which are numbered from to 1 to 5. What can be tricky with impulsive moves is that two out of the five waves are always corrective waves which could turn the market into the opposite direction. The corrective waves are usually the 2nd and 4th wave, and they can take a turn into the opposite direction. To explain it more easily imagine that the waves 1,3, and 5 are bullish and move upwards, whereby the remaining two waves move downwards as bearish waves. If such a situation happens, it is recommended to buy call options for the waves 1,3, and 5, and put options should be placed on expectations for the remaining two waves. This implies hedging positions, which is anyways one of the most used options strategies. Hedging refers to trading opposite positions, whereby traders can set different expiry periods.
Longer Expiry Periods for Waves 1,3, and 5
Let’s assume we are trading on a four-hour chart and we have a five-wave structure to the upside, longer expiry periods like a week or month can be set for call options, whereby the put options in the eve of all three waves can be placed with shorter expiry periods. Trading put options can be a little bit riskier here, so traders should invest smaller amounts in the put options since there is a bigger chance that the primary trend will “win.”
Every impulsive move will be accompanied by a correction wave, and that is what makes it difficult to pursue the ideal striking price for a put option after a trend move downwards because one always has to take into account the correction waves that will follow.
Trapping the Bear
During the time a corrective wave is formed causing a change of directions, the upward trend will still be prevailing in real-time leaving the bear trapped. Many traders are so focused on catching the longest third wave that they often forget to pay attention to the corrections and what they might do. An impulsive wave is easily spotted since it stands out from the rest and it characterizes vivid market activity since everyone will try to get their piece of cake when the market is moving rapidly.
We have already mentioned several times that the third wave is usually the longest one, but it does not exclude other set-ups by far since the longest wave is sometimes the fifth or yet even the first wave.
No matter how lucrative it sounds when we have an impulsive wave, the fact is that it will be hard to assess the situation properly when corrections start to form. It is as risky as it sounds and the juggling between put and call options is not always that simple.
As traders, we have to take into account all the aspects, timeframes, expiry periods, bearish and bullish trends within the same five-wave structure and their outcome. An impulsive wave is not a clear-cut move in the market, just like no trading move. A certain risk will always be there.
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References and Further Reading:
- SOLUTION OF AN INTEGRAL EQUATION OCCURRING IN IMPULSIVE WAVE PROPAGATION PROBLEMS (C. L. PEKERIS)
- Dynamic Wave Loads on Coastal Structures: Analysis of Impulsive and Pulsating (Wave Loads, Giovanni Cuomo, William Allsop, Kirsty McConnell)
- Numerical estimation of the wave forces acting on a three-dimensional body on submerged breakwater (Dong-Soo Hur1, ,Norimi Mizutani)
- Quantum fluctuations in the field of an impulsive spherical gravitational wave (M Hortacsu)
- Reduction of Impulsive Noise Caused by Unsteady Compression Wave (Heuydong KIM, Toshiaki SETOGUCHI, Kazuyasu MATSUO)