X Waves Explained
As we have already talked about corrective waves and their significance on our Binary Options Education page, it is clear to most traders that there are three types of corrective waves. To refresh our memory, let us repeat them one more time. They can be a zigzag wave, a flat wave, or a triangle pattern.
The x wave is the focus of this review, and in broader terms, it is a corrective wave, while in a narrower sense we call it the intervening wave or a connecting wave since it major role is to connect.
It connects two different corrections of the same level, as for example, two zigzag waves or two flat waves, and connection of a zigzag and flat wave is also not excluded.
We have also mentioned that the wave is sometimes marked with XX, which simply means that there are two of them. Whether there is two or one wave depends on the complexity of the whole structure, but the bottom line is that even in a double formation, the waves have the same task as they represent the link between different two or more waves.
The X Wave as Corrective Wave by Nature
The X wave is always a corrective wave by definition, and it can be an independent flat, zigzag or triangle. The X wave is rather a simple wave, but it can also be a complex corrective wave from time to time. When we look at the Elliot Waves theory, we get to know that the X wave is a connective wave or linkage which is a part of a bigger complex correction. This means that the X wave always gives a hint of a complex correction, and the only thing left to see is if we are dealing with one or two X waves.
How to Interpret X waves?
The golden rule for interpreting an X wave was and remains the Fibonacci retracement tool, as the Elliot Waves theory also indicates. How do we know we have a complex correction? The answer is simple since we only have to observe whether the X wave ends above 61.8% retracement level in comparison to the first corrective wave, and if it does, we are having a complex correction unfolding on our charts with a very strong X wave. Complex correction is still in place even if the X wave ends below 88.1%, but this indicates that the X wave is rather small and weak.
For traders, it is advantageous (if not mandatory) to make a distinction between the two different states of the X wave, since it plays a crucial role in predicting what is going to be formed on the right part of the chart, and at the same time, how the upcoming prices will move.
Especially when it comes to binary options trading, traders have to know in detail where each wave is going to end since it is crucial for using the Fibonacci tool. Traders have to drag the Fibonacci tool from the right position to discover whether there is a small or big X wave. Once traders have done this correctly, they can predict the striking price of a bullish or bearish trend.
X Waves Pattern is not that Complex
When we observe the structure of a previous correction, we can assess pretty much accurately what the X wave will look like. Traders should not expect a complex corrective wave at first since the first wave is always a simple one, which means that a triangle never appears first. What traders can expect of the first wave is a zigzag or flat pattern. Still, a third possibility is also open, namely the first wave can be an independent pattern moving on its own which means that it can be an independent triangle, along with an independent zigzag or flat wave. When you, as a trader, identify the first wave to be flat, then you might as well expect the X way to be a complex correction. It should also be noted that the X way is a bit less complex.
As an advanced options trader, it is recommended to be familiar with the formation and movement of the X wave, as well as when it forms if you want a real shot for deciphering the price movements. X wave identification helps with decisions of whether to trade tops or bottoms. The ultimate goal or finish line is trading a market direction which will make it to the right side of the screen before the expiration period runs out.
Traders should not only focus their attention on the striking price but also to the expiry date, which should be in line with the timeframe of the chart the waves appear on, which is also an integral part of the wave analysis. When the trader is examining the waves on a daily chart, or the four-hour chart, they will not make any us of selecting a short-term trade, lasting for an hour or less, since it is most likely that the option will expire before the striking price even appears. Trading such an option on such an inadequate chart will not result in profitable trading. This only tells us that the timeframe has to be adjusted to the expiration period of a trade.
The Elliot Waves theory is also not efficient with expiry periods under one hour since the different subdivisions do not produce the needed cycles. The X wave on its own depends on the time frame, expiry period and the structure, and those are the three key points.
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References and Further Reading:
- Elliott Wave Principle: Key to Market Behavior (Alfred John Frost, Robert Rougelot Prechter)
- Trading In Futures: Why Markets in Education Don’t Work (Watson, Sue, Waslander, Sletske, Strathdee, Martin)
- Trading spaces: Computation, representation, and the limits of uninformed learning (Andy Clark (a1) and Chris Thornton)
- George Lindsay and the Art of Technical Analysis: Trading Systems (Ed Carlson)
- Trading systems in European stock exchanges: current performance and policy options (Marco Pagano, Ailsa Roell)