Trading means looking at the markets and trying to identify potential patterns that should allow traders to forecast future price action. This is what every trader is looking for, to forecast future prices.
What are Wedges?
However, in the case of binary options one should also incorporate the time element. So how about the time element? Is it possible to incorporate time in an analysis and in the same analysis to put the price target too? Price and time, the holy grail in any analysis is possible if/when using wedges. With CFDs this means projecting possible stop loss/take profit levels settings. Wedges are considered to be reversal patterns (even if that is not entirely true as there is one situation in which wedges are not acting as they are supposed to) and, like the recordings that come with this educational series show, are traveling in five waves, labeled with numbers, 1-2-3-4-5.
Falling and Rising Wedges
Any wedge travels within the 1-3 and 2-4 trend lines and the most important line is the 2-4 trend line. A falling wedge is supposed to rise (meaning it is a bullish pattern, so we should look to buy BUY CFDs/ CALL options) and a rising wedge is supposed to fall (meaning is a bearish pattern, so we should look to buy SELL contracts/ PUT options).
All eyes should be on the 2-4 trend line as that is the most important one and a break of these line means trend is changing or is about to change and that is a proper place to go LONG (in the case of a falling wedge) or SHORT (in the case of a rising wedge).
Like the videos are showing, a break of the 2-4 trend line comes with a target to the upside/downside and with the time element to be looked for pattern confirmation.
This means looking at the whole time it took the wedge to form, project it on the right side and target 50% retracement level to come before the time element to expire. Basically, the target should be reached in less than the time taken for the whole wedge to form.
And this brings us back to the price and time issue and, depending on the time frame the pattern is appearing on, a specific expiration date should be chosen.
According to the Elliot Waves Principle, a possible wedge looking like pattern is forming as an impulsive move with a 1st wave extension, in the sense that the first wave is the longest out of the all five waves that define the pattern. Such impulsive moves are extremely common and while there are not that common like the third wave extensions, they are still appearing quite often and a clear understanding is vital.
Wedges According to the Elliott Waves Theory
Elliott Waves Principle/Theory is considered to be relative in the sense that, However, as mentioned earlier in the article, wedges are being interpreted as being reversal patterns. Is that correct? Is that the case in 100% of the cases? The answer is no and this is happening only when the wedge is appearing as a 5th wave in a five waves structure.
If the wedge is forming as the third wave, like it is very much possible, then trading PUT options by the time the 2-4 trend line is broken can be done but only with short-term expiration dates and having an eye on the time frame the pattern appears. The reason for that is the fact that after the 2-4 trend line of this kind of a wedge is broken to the downside then the 4th wave started and that one is depending on the complexity of the second wave as well.
5th Elliott Wave Wedge
No trader should take the risk of underestimating a 5th wave as it may very well be the extended one. This would make the option expire out of the money. If the wedge is appearing as a 5th wave then it is called a terminal structure and the key there is to trade by the time when 2-4 trend line is broken and look for the whole wedge to be retraced as these are indeed reversal patterns.
In this case in here we have all the waves of the wedge as being corrective, whereas in the first instance only the 2nd and 4th wave are, so counting with the Elliott Waves Principle will be extremely difficult.
However, it is not impossible and more details are to be found by watching the two videos in this article, bearing in mind that wedges are extremely common patterns as there is virtually no time frame and asset that is lacking wedge formations.
Binary options trading should not be more different than trading any other instrument, such as Forex CFDs, as the only difference is the expiration date. On the other hand, it keeps you more disciplined in the sense that over trading tends to be avoided while when trading other markets, like forex markets, for example, there is always the tendency to add to a losing position and this is usually leading to heavy losses.
And this brings us back to the price and time issue and, depending on the time frame the pattern is appearing on, a specific expiration date should be choose. More details in the video analysis above.