Before even going into the types of corrective waves a market may make it is worth noting that markets are spending well more than 65% of the time in consolidation patterns, or ranges.
These ranges/consolidation areas are formed out of corrective waves so a clear understanding of how corrective waves are formed and how a corrective price action looks like is of great value to any trader and offers a competitive advantage in front of the markets. When analyzing markets one should know that there are only three types of corrective waves:
- zigzags, and
Each and every one is then developing into different subdivisions of the same pattern, but in principle they are three and three only.
From these three simple corrective waves, complex corrections are forming and each and every complex correction contains at least an intervening wave, or a so called connective wave. These intervening waves are always labeled with the letter “X” and depending on the interpretation, they may also be labeled XX. The actual labeling is not that important as more important is the fact is that they are corrective as well.
Various Types of Waves
Like the name suggests, they are all corrective, so the inner structure of a lower degree in each and every pattern there is corrective and this is extremely important in any analysis. For example, the difference between a flat and a zigzag is being made by interpreting the retracement level the b wave makes in comparison with the previous wave a and by doing that one knows how to label the move forward, how to forecast future price action and, more importantly, how to trade binary options based on that retracement level.
Being corrective waves, they should all be labeled with letters, abc for zigzags and flats, abcde for triangles, and this says everything about them: they are “threes” in the sense that are formed out of three waves. Even the triangles are considered to be “threes” as price is forming abc’s of a lower degree for each and every wave of the triangle.
The vast majority of traders fail to grasp the fact that corrective waves are all over the place in the sense that even in a five wave structure, or in an impulsive move, out of those five waves, three are impulsive and two corrective. Then if you’re considering that the two corrective waves are supposed to be different in construction, distance price travels, etc, then at least of them will be quite substantial.
Types of Corrections
Corrections can be simple or complex and it is worth noting that complex corrections are more common than simple ones. How does one knows how to make the difference between a simple or complex correction? One way to do that is to look for simple corrections within complex ones. After all, a complex correction is nothing but two or three simple corrections connected by one or two X waves.
The X waves on their own are also corrective waves, most likely simple ones, but that is another story. What I am trying to say here is that complex corrections at the most complicated structure may end up having five different simple corrections, this being the maximum complexity degree. Taking into account all of the above, how to use that info and trade binary options?
Actually it’s not that complicated. For example, whenever you identify a bullish or a bearish trend, regardless of the time frame the trend is forming on, and it ends with a triangle, then that is a sign a complex correction is about to end.
The Three Wave Structure
The thing to do is to wait for the b-d trend line in that triangular formation to be broken as that is the actual moment the complex correction ended. Considering the fact that it is a corrective wave, namely a so called three wave structure, it should be followed by a retracement level of minimum 61.8%. Therefore, taking a Fibonacci retracement tool and measuring the whole correction would offer the trader the real target. Until that target comes, we can trade either way, depending if the complex correction was a bearish or a bullish one.
When measuring the complex correction the trick is to know exactly when it ends as it is rarely traveling from the lowest to the highest point. If it ends with a triangle like in the above example, then it is vital to know the end of the triangle as that is the end of the correction and that is where the Fibo should end as well. Simple corrections are also common and if you’re considering triangles as being the most common correction, then look for triangles as they are the favorite way of consolidation. Find out more about Elliott Waves theory and trading binary options with simple and complex corrections by watching the two video recordings that are coming with this educational series.