In Elliott Wave Theory, an impulsive move is a 5 wave structure with at least one extended wave. For the largest wave to be extended, it must be greater than 161.8% as compared to the wave which is the next longest. Most commonly, the third wave will be bigger than 161.8% as compared to the 1st wave, however this will not always be the case since either of the other 2 waves may be extended too.
When trading binary options, a trader must bear in the mind the time frame of the analysis and set an expiry date that is based on the appropriate time frame.
Which Ways Can an Impulsive Move Extend?
In a fifth wave impulsive move, the pattern’s outcome should be bearish in the event of a bullish move or bullish in the event of a bearish one. This is because the market always retraces 61.8% of the fifth wave and this usually comes rapidly. Therefore, when an impulsive move is identified with a fifth wave extension, a trader should buy call options should the impulsive move be to the downside or put options should the impulsive move be to the upside.
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There are several ways in which an impulsive move is able to extend, and most commonly it will have a 3rd wave extension. Following that, the 1st wave extension is second most common. The fifth wave extension is the rarest to occur and often, by the time it has been identified, the extended target has already been reached.
However, a fifth wave extension can be traded by observing the price action which follows a 5th wave extension, which depends on the wave of bigger degree. A 5th wave extension may appear as the C wave in a flat pattern, and in those circumstances, it is usually 100% retracement. Therefore, depending on the time frame on which the extension is appearing and impulsive move’s direction, a trader can either buy put or call options with an adjusted and appropriate expiry date.
Fifth wave extension are extremely rare, and therefore if you think you are observing one forming in the market, you should take great care to observe all of the impulsive move details as it may just be a running correction or a double extended impulsive move and you may end up making an error in identification and therefore execute a losing trade.
Observing the Second and Fourth Wave Structures
If you suspect a fifth wave extension, you should observe the 2nd and 4th wave structures to see if there is any overlapping i.e. the 4th wave travels into the second wave’s territory. If there is no overlapping observed between these waves, the move following the impulsive move must have a maximum of 61.8% retracement while if any overlapping exists, 100% retracement is assured.
A wise investor can trade the 5th wave extension by looking at the entire distance that the price is travelling from the beginning of the impulsive move up to the end of the 3rd wave and then calculating 61.8% of it. A trader should then project that result on top of the 3rd wave to find the ideal place to purchase put options on a 5th wave extension bullish impulsive more or purchase call options in the case of a 5th wave extension impulsive bearish move. The more the price moves to the downside or upside from that level, investment should be more aggressive.
By adopting these strategies it is possible for a sensible trader to profit significantly from 5th wave extension impulsive moves as long as they can correctly identify them and take the appropriate trading action.
Other educational articles:
- How to Use Hedging Strategy to Manage Risk Effectively in Binary Options Trading
- Using Fundamental Analysis in Binary Options Trading
- What is the Zig Zag Indicator in Binary Options Trading?
- What is the Trend Following Binary Options Trading Strategy?
- Reversal Patterns Triangles Trading Strategy
- Profit From Trading Rare Fifth Waves Failures With Elliott Waves
- Manage Your Trades With Elliott Wave, Ryan Henry, Technical Analysis Inc
- How Can The Elliott Wave Principle Improve My Trading? – elliottwave.com
- Wave Principle Guide, Andrew Egan Baptiste, Morgan Stanley