The idea of alternation is found in Elliott Wave Theory, and refers to corrective waves. In this theory, the second and fourth waves of an impulsive wave, five wave structure or motive wave are said to be alternating in different waves, which is essential for the move to be a valid impulsive one.
An alternation can appear in several ways, but distance, strucutre, time and construction are all mandatory.
Time refers to the time taken for the market to consolidate for the 2nd and 4th waves and therefore the time taken will be different.
In the case of structure, if the 2nd wave is a complex corrective one such as a double zigzag or double or triple combination then a trader should expect a simple corrective wave such as a flat, zigzag or simple triangle for the 4th wave.
Construction is similar to structure, however here it is important to observe the number of subdivisions within each correction.
Distance is referring to the actual distance that the price travels from the start of the corrective wave until its end.
An impulsive move is not supposed to channel and this is a simple definition of alternation for both corrective waves in Elliott Wave Theory.
Observing the Subdivisions Within Each Correction
If you see movement, whether it is bearish or bullish, this is channelling and it cannot be an impulsive move. Instead, it is more likely to be a corrective wave, such as a pattern from the zigzag family,
For the principle of alternation to work, the trader must first draw a 0-2 trend line, i.e. a line which stretches from the start of the impulsive move to the second wave’s ending point. This means that the end of the 2nd wave will be known and this is the minimum time that must be waited in order for analysis to occur. After that, they should copy the 0-2 trend line, projecting it forward from the end point of the first wave.
Finding the Forming Channel
This will show the forming channel, and if an impulsive move occurs respecting the principle of alternation, the channel’s upper side will be broken and the market will travel with the impulsive move’s third wave above the trend line, should the move be bullish, or below the trend line should it be a bearish move.
The 2nd and 4th waves will be different, and if they are not, a trader should be suspicious. They should look at the structure of both waves as well as the waves’ sub-segments and the distance travelled by the price. Time is also an important factor, as if the 2nd wave is taking a long time to consolidate, the same cannot be expected in the case of the fourth wave. The 4th wave will therefore most likely be a simple correction, so to trade binary options effectively, the investor should use the Fibonacci retracement tool and wait until the market as retraced either the 23.6% or 38.2% levels as this will give the ideal striking price for the simple 4th wave which will be followed by a 5th wave.
It is vital to recall that the principle of alternation requires the trader to only look out for the 2 corrective waves and not the impulsive moves, so waves 1, 3 and 5 can be disregarded.
Should the first wave extension be an impulsive move, then most of the time, the second wave will be the most time consuming, and therefore projecting this amount of time at the point that the third wave ends will give the trader the maximum formation time for the fourth wave, opening the way to scaling into position by time, not by price. An investor should trade call options in the case of a bullish impulsive move, or place put options in the case of a bearish move.
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- Legitimacy, Globally: The Incoherence of Free Trade Practice, Global Economics and Their Governing Principles of Political Economy , Umkc L. Rev., 69, p.733., Davis, M.H. and Neacsu, D., 2000.
- Game-Theoretic Analysis of Trading Processes, No. TR-474. STANFORD UNIV CA INST FOR MATHEMATICAL STUDIES IN THE SOCIAL SCIENCES, 1985, Wilson, Robert.