When it comes to corrective waves and Elliott waves theory, there is nothing more complicated than trading complex corrective waves. Complex corrections mean that price is forming more than a corrective wave (like a flat, a zigzag or a triangle) and knowing when to look for such a corrective wave is key.
In the recordings that are coming with this mini-educational series the notion of a double zigzag is explained and what makes the difference between a double zigzag and a triple one. The answer is: the x wave. A double or a triple zigzag is nothing but a series of two or three different zigzags, connected by an intervening x wave, in the case of a double zigzag, or two x waves, in the case of a triple zigzags.
BUY contracts / CALL options should be traded if the corrective wave is coming after a bullish trend, and SELL/PUT in case the corrective wave is coming after a bearish trend. All of the above represents the simple approach when trading such patterns. In reality, they should be treated with much more attention as a correct understanding is vital in knowing what to look for when trading- be it binary options or CFDs. The approach that is needed should be one based on cautious and waiting for some steps to happen.
Approach Trading with ZigZags Step by Step
For example, in any zigzag the first thing to do is to take a regular trend line and draw it from the beginning of the zigzag all the way to the end of wave b. This is also called the 0-b trend line.
Next thing is to copy and paste that trend line and place it at the end of wave a and just like that we’ve created a channel on the right side of the screen, basically making a forecast.
Both, the double and a triple zigzag are channeling really well, so in a rising channel that is formed the way we described it above, by the time market is testing the lower side of the channel, we should go with BUY CFD/CALL options and in a bearish channel we should buy of course SELL contracts/PUT options by the time market is testing the upper side of the channel.
Intervening Channel – a Connective Wave
The move that is testing the opposite side of the channel is being called an intervening wave, or a connective wave, and in Elliott Waves Theory it is labeled with the letter X. It shows it is a corrective wave, as only corrective waves are labeled with letters, and it shows that it is part of a complex correction.
In our case, the complex correction is the double or the triple zigzag that make the object of this article.
Moreover, knowing that such patterns are channeling really well, by the time when price is reaching the upper side of a channel in a rising trend, we should go and buy put options with a bigger expiration date than the call options bought previously. The reason for that is that we don’t have a time constraint and market may form, say, a triangle at the opposite direction of the channel and this means it needs some time until it turns.
Triple Zigzags are Rare, Double ZigZags are More Often
The same is valid on a bearish channel, when market is reaching the lower side of the channel after the x wave was completed, that is a nice place to buy call options. It is worth noting that triple zigzags are really rare and this makes the double zigzag being the most likely pattern to be seen when charting the currency markets.
The sign that the whole pattern is completed or is about to be completed is given by the time the channel is broken and therefore BUY contracts/CALL options should be bought on a break of a falling channel and SELL contracts/PUT options on a break of a rising channel.
The expiration date when trading these patterns should be given, yet again, by the time frame the patterns are forming as if you identify a double zigzag on the hourly chart then end of day expiration date options can be traded as well as hourly expiration dates if the striking price is when the x wave ends. To end, out of all patterns that can be traded using the Elliott Waves Theory, these are patterns in which price is travelling really fast as we all know by now that a zigzag is formed out of two impulsive move.