What is an Impulsive Move?
An impulsive move as described by Elliott is a five wave structure in which at least one wave is extended. In order for the biggest wave in the structure to be extended, it needs to be more than 161.8% when compared with the next longest wave.The most common arrangement is for the 3rd wave to be bigger than 161.8% when compared with the first wave. However, that is not always the case as the other two waves can also be extended.
What is a Fifth Wave Extension?
In the case of a 5th wave impulsive move, the outcome of such a pattern should be bullish in the case of a bearish impulsive move, and bearish in the case of a bullish move. The reason for that stays with the fact that market is always retracing 61.8% of the 5th wave and usually this comes quite fast. Therefore, upon identifying an impulsive move with a 5th wave extension, one should go LONG (BUY/CALL options) if the impulsive move is to the downside, and SHORT (SELL/PUT options) if the impulsive move is to the upside.
There are multiple ways an impulsive move can extend and the most common one is the third wave extension. By most common I mean really the most common and the very next one is the first wave extension. Before moving forward, it should be mentioned that by extension we are referring to at least one wave that should be bigger than 161.8% when compared with the next one and the 161.8% is only the minimum condition as the extension can go way bigger.
How to Identify Fifth Wave Extension?
The least common of them all is the fifth wave extension and it means that the fifth wave is by far the longest wave out of all motives waves in the five wave structure and usually by the time market participants are realizing they have a fifth wave extension the extended target is already reached.
What should trader do then, if the extension is difficult to trade?
The answer comes from the price action that follows a fifth wave extension and it depends very much on the wave of the bigger degree. A fifth wave extension can appear as the c wave of a flat pattern and in these cases it is almost always one hundred percent completely retraced so depending on the time frames the extension is forming and the direction of the impulsive move, call or put options can be traded with an appropriate and adjusted expiration date.
There is nothing more tricky though than a fifth wave extension that appears as a fifth wave in an impulsive move and it should be considered that this kind of pattern is always completely retraced as well.
As a rule of thumb, these extensions are really rare and if you think that market is forming one you should be very careful at all the details of an impulsive move as it may very well be nothing but a double extended impulsive move or a running correction for the second wave in a third wave extension impulsive move and either one of these two situation is leading to a fake signal being created and a losing option to be traded.
What I would do in the case of a fifth wave extension is to look at the structure of the second and the fourth waves prior to the fifth one and check if there is overlapping or not. If there is no overlapping between the second and the fourth waves (overlapping means the fourth wave to travel into the territory of the second wave), then the move to follow after the impulsive move is maximum 61.8% retracement, while overlapping basically assures one hundred percent complete the retracement.
How to Use It?
The way to trade a fifth wave extension is to look at the whole distance price is traveling from the start of the impulsive move until the end of the third wave and calculate 61.8% out of it. The next step is to project the result on top of the third wave and that is the place to buy put options on a bullish fifth wave extension impulsive move or call options in a bearish fifth wave extension impulsive move. The more price is moving to the upside/downside from that level, the more aggressive the investment should be and the trading as well.
Clear examples on how a fifth wave extension impulsive move is looking like are to be found by watching the videos in this article. In our Forex Academy project here on Fair Binary Options we have many Elliott Waves related articles and by reviewing them all it will be a bit easier for you to understand the concept of an extension and how to be applied to binary trading.