The X Wave is a phenomenon that occurs as part of the Elliott Waves Theory. The primary characteristic of X Waves it that they connect at least two corrective waves in the same degree. For example, in the case of a double zigzag, the two individual zigzags will be connected with the X Wave corrective wave. X Waves can be either large or small, and can be a part of either small or strong corrections. The golden ratio – 61.8% represents the difference between these two patterns. Based on this golden ratio, it is possible to find the difference between the various correction types and thus to find the correct striking price for an option.
When interpreting X Waves, using this golden ratio is key. If X Waves end higher than the golden ratio level in comparison with the initial correction, the correction is a complex one with a strong X Wave. However if it ends below the golden ratio level, the correction could be described as a complex correction with a small X Wave. Interpreting this correctly helps a trader gain a clearer picture of the right part of their chart and to better forecast the future movement of prices.
What is the Difference Between Impulsive and Corrective Waves?
X Waves can be difficult to grasp as a concept as it can be hard to tell if the market is forming a complex or a simple correction. While an X Wave must occur in a complex correction, they are not necessary in a simple correction. In general, X Waves are always corrective, and depending on the previous correction that it follows it could either be a simple or complex correction. Most times, it will be a simple correction such as a flat, zigzag or triangle pattern.
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How to Trade X Wave Patterns
X Waves should be confirmed by the market before trading them, as if it is a simple correction then there are specific conditions which must be met in order to the price action to come.
Retracement levels need to be calculated by taking the entire length of the corrective way that occurs before the beginning of the X Wave into account, and this can be challenging when it occurs in the form of a zigzag or a triangle. However, the ending point of the previous correction must be determined in order to find the golden ratio (61.8%) level. An X Wave cannot end above this ratio – although parts of it are permitted to move beyond this area, it cannot end there.
Impulsive ways are key to market movement, occurring in five wave structures that will always be followed by a three wave corrective structure. Impulsive waves contain two corrective waves which have the same degree, the 2nd and 4th waves. If one is complex, the other has to be simple and vice versa, making an X Wave’s presence mandatory.
In order to effectively trade an X Wave, an investor must first look at the initial correction and then draw the Fibonacci retracement level in order to determine where the golden ratio (61.8%) retracement occurs. Once the 38.2% retracement level has been reached, a trader can place a put optionl remembering to take into account the pattern’s time frame to select the correct expiry date. Investors should not make a large investment at this point however, as trading aggresivity will usually increase as the market moves closer to the golden ratio level and therefore a trader can place a more aggressive put option at the 50% level.
Although X Waves can be a difficult to understand concept, once a trader can got to grips with it, they can enjoy excellent trading opportunities by identifying and correctly trading on a complex or simple X Wave.
Other educational articles
- What are Japanese Candlesticks in Binary Options Trading?
- What is the Contracting Triangle Pattern in Binary Options Trading
- What are Impulsive Waves in Binary Options Trading?
- What are Corrective Waves in Binary Options Trading?
- Triangles as Continuation Patterns in Binary Options Trading
- Divergences In Binary Options Trading