A running correction is a term that means a second wave of a impulsive move which ends above the ending point of the prior first wave in the case of a bullish trend, and in the case of a bearish trend, the ending point of the second wave will be below the end of the prior 1st wave.
When this pattern is observed, a trader will be aware that the running correction will always be followed with a strong move to the same direction. Although there is a misconception that this sort of pattern only rarely occurs, in fact it is relatively common and therefore having a good understanding of running corrections can only lead to more successful trades.
Using the Extended Wave for Measurements
When using the Elliott Waves Theory, there is always one wave of a 5 wave structure which is extended i.e. its minimum length of distance to be travelled will be 161.8% as compared to the prior wave. The key to this measurement however is the starting point, and this will depend on the extended wave. Usually, it is the third wave which will be the extended one, and this makes the second wave a complex correction. If the intervening X wave is a large one, i.e. greater than 61.8% as compared to the entire prior correction of the same degree, the chance of the second wave forming a running correction is quite likely.
A running correction will appear the majority of the time as a second wave in an impulsive move, and therefore the 3rd one will be the extended wave. Should the impulsive move be a rising or bullish one, call options are the recommended choice for the trader to execute, however if the impulsive move should be falling, or bearish, put options should be traded instead. In either of these situations, the expiry date can be shorter than might be recommended otherwise.
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Running Corrections in Zigzag Patterns
A running correction may also form as a B wave of a zigzag pattern, and this is the second most commonly observed type of running connection in technical analysis. The B wave in this situation will be aggressive and should not retrace greater than 61.8% as compared to the prior Wave A. As it is a running correction, it should also end above the ending point of Wave A. The extension will follow, however it should not channel as it is a zigzag.
There is also the possibility of a running correction appearing as the 4th wave of a 5 wave structure, however this is less common. It is also quite tricky to trade as, not only is it quite rare, it is also followed by a very powerful impulsive 5th wave extension.
Often, traders fail to understand running corrections correctly as the idea of a corrective wave ending above the highs of the prior first wave (for an impulsive bullish move) or the lows for an impulsive bearish move can be complex to grasp. Despite popular beliefs, an impulsive move’s second wave will rarely end beyond the 61.8% retracement level of the prior first wave and when this happens, the correct way to interpret the market is to look at the retracement as part of the running correction i.e. as just Wave A of the running correction with the B wave and X wave that will follow exceeding its highs.
Overall, understanding running corrections is very important in the success of trading and analysing the market using Elliott Waves Theory. This is because every traders needs to be aware of when the market is travelling at its fastest since the idea of making easy and quick profits is extremely appealing. When money management and discipline are combined with a good understanding of the way the market is moving, the trader is much more likely to be successful in their binary options trading venture.
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- What is the Zig Zag Indicator in Binary Options Trading?
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