Types of Corrective Waves
Before discussing corrective waves, it should be mentioned that the market is holding still or that it is in a state of consolidation for almost 70% of the time. It will exceed its ranges only in approximately 30% of the time.
The consolidation area consists of corrective waves and traders can make use of their knowledge on how corrective waves are formed, and they should know how to recognize a corrective price action. The knowledge of these features will gain an advantage to the trader in the competitive market.
Corrective waves come only in three forms, and those are flat waves, zigzag waves, and triangles. All of them have their subdivisions into which they develop, but they all develop only from these three patterns.
Complex corrections will arise from one of the three simple corrective waves, and every such correction consists of one or more intervening waves, which are also known as the connective waves. These waves will be marked with the letter X or XX, which depends on how the waves are interpreted. Marking the waves is not as crucial as the existence of the corrective wave itself. It is important that a corrective way is present to help our trades, and how we mark it is yet secondary.
Different Wave Types
There are several types of corrective waves which are characterized by the pattern’s inner structure of a lower degree, and the observation of such a wave can be important for analysis. It is important to distinguish the waves from each other, so that traders know the difference between a zigzag and a flat wave by analysing the retracement level of wave b in connection to the movement of the previous wave a, and if traders know to interpret it correctly, they will be able to mark the forward action and predict future price moves, and at last, they will know to place options in the binary options market on the basis of their retracement interpretation and corrective wave strategy.
Corrective waves should be marked with letters, whereby flat and zigzag waves should be marked by abc and the triangles abcde. Corrective waves are formed out of three waves, including triangles since the price will form an abc wave of a lower degree for all triangle waves separately.
Many traders miss to no notice that corrective waves are pretty much common and are basically found at every step. One should be aware that with even a five-way structure or an impulse movement, there are three impulsive waves, but two are corrective. Even if the two waves seem to differ in structure, distance price, traveling speed, it is should be noted, that at least one of the two will be crucial.
What Types of Corrections Do We Have?
Even if they can be divided into simple and complex, one should get used to the fact that complex corrections are more frequent than the simple ones. A trader should know how to differ between the two. This can be done by trying to find simple waves within the complex waves since a complex correction is just a wave made out of two or more simple corrections which are connected by the X waves (mostly by just one or two X waves).
The X waves, if observed in isolation, are also just simple corrective waves. The point is that a complex correction with the most complex construction can even have up to five simple corrections, and a five-simple-corrections structure is the highest complex form since it cannot happen to have 6 simple waves forming a complex correction. Now, the question how to apply all of this information to binary trading basically asks itself.
Once you go through it a couple of times, it is not difficult at all. Simply follow the development of a bullish or bearish trend, not taking into account the trend’s timeframe, and if you spot a triangle at the end of the trend, you should know that a correction is soon to expire.
Structuring with Three Waves
The correction’s end is the moment when wave b, wave c, and wave d form a triangle and the triangle is broken by the trend. Do not forget that you are dealing with a corrective wave, which automatically implies that you are dealing with a three-wave structure, and it strongly indicates to follow it at a retracement level of at least 61.8%. When this happens, it is the right time to reach for the Fibonacci retracement tool for measuring the correction, which will eventually reveal the real target. In the meantime, before reaching the target, traders can simply place call or put options on the basis of whether the correction was a bullish or bearish trend.
The measuring can sometimes be difficult for traders since they do not know exactly when it ends, and it is highly unlikely that the trend will move from the lowest to the highest point. This means that the strategy is applied properly when the trader knows where the complex correction ends.
For example, if we take the example from above when it ends in a triangle, it would be crucial for traders to know when the triangle ends which is the ending spot of the correction as well. Triangles are usually the favorite consolidation pattern. Simple corrections might not appear as frequent as complex, but a trader should know that they can come across them as well.
To learn more about the Elliot Waves theory and options trading, read more articles featured in this educational series.
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References and Further Reading:
- Systems and methods for suppressing pressure waves using corrective signal (Joseph Alan Hogle, Michael Glynn Wise, Steven Mark Shaver, Michael Eugene Austin)
- Trading Applications of Japanese Candlestick Charting (Gary S. Wagner, Bradley L. Matheny)
- ELLIOTT WAVES RECOGNITION VIA NEURAL NETWORKS (Martin Kotyrba, Eva Volna, David Brazina, Robert Jarusek)
- An integrated stock market forecasting model using neural networks (Gary R. Weckman, Sriram Lakshminarayanan, Andy Snow)
- THE APPLICATIONS OF THE FIBONACCI SEQUENCE AND ELLIOTT WAVE THEORY IN PREDICTING THE SECURITY PRICE MOVEMENTS: A SURVEY (Amitava Chatterjee, Ph.D.)