In one of the previous educational series here on Binary Options Academy we presented the corrective waves and said that there are three categories of corrective waves: zigzags, flats and triangles. The X wave is still a corrective wave and the most important thing to remember or to take into consideration is the fact that it is coming as an intervening wave, or a connecting wave.
Basically, it is making the connection between two different corrections of the same degree, so it can actually connect two zigzags, or two flats, or even a zigzag or a flat. Depending on the complexity of the move in a complex corrective wave we could actually have two x waves and the role will be the same, to act as a link between the two or three corrections of the same degree.
X Wave – a Wave With a Corrective Nature
The X wave is mandatory to have a corrective nature and therefore it can be a zigzag, flat, or a triangle on its own. Usually, it is not a complex corrective wave, but this is not mandatory. According to the Elliott Waves Theory, an X wave is an intervening wave, or a connecting one, that is part of a complex correction. Basically, such a wave is always indicating a complex correction is in the makings and the only question that remains is if that correction implies only one X wave or two.
Interpreting X Waves
The key to interpreting an X wave comes, once again, as many other things with Elliott, from the Fibonacci retracement. If the X wave ends higher than 61.8% retracement level when compared with the first correction, then we’re having a complex correction with a strong X wave. On the other hand, if the X wave ends below that level, then the correction is a complex one with a small X wave.
The difference between the two is important as in this way the trader has a better view on what is forming on the right side of the chart as it is allowing to forecast future price movements. In terms of binary options trading, it is vital to know exactly where each and every wave is ending as otherwise we would not know from where to drag the Fibonacci tool to find out if the X wave is a small or a big one. This in turn gives us the perfect entry for a striking price into either a call or a put option.
X Wave – a Less Complex Pattern
The nature of the X wave is important as well as we know before-hand what it will look like based on the structure of the previous correction. First of all, it is important to note that the first correction, which is always a simple one, cannot be a triangle. That being said, the only two remaining options are for the first correction to be a zigzag or a flat or to be a simple correction on its own (zigzag, flat or triangle). On the other hand, it the first correction is a flat, then the X wave may as well be a complex correction.
As a rule of thumb, it is generally wise to say that the X wave is one degree lower in complexity.
For binary options trading, understanding the nature of the X wave, where it appears and how it forms is crucial in trying to pick tops and bottoms and in what future price action means. After all, this is all about trading one direction of the market and to be on the right side of the market by the time the expiration date is coming.
Equally important as the striking price, the expiration date should and must be adapted to the time frame the analysis is being made as the usual caveat applies here to. If the analysis is made on the daily or four hours chart, it makes virtually no point in picking a short term expiration date like hourly or lower as chances that the option will expire out of the money are considerably higher than for the option to be profitable. Therefore, calibrating the expiration date based on the time frame is key.
More than that, lower than the hourly chart it makes no sense to look at markets with Elliott Waves eyes as the subdivisions are so numerous that cycles are starting to lose sense anymore. Add to this the uncertainty created when markets are really not moving, like in the summer time or in the Asian sessions, and the outcome is that trading binary options based on X waves should be avoided on lower time frames. If one is interested in the bigger picture, that is a different story but then the expiration date should be accordingly.
Find out more about X waves, where are they appearing and what the implications for binary trading are by watching the two video recordings that are coming with this project.