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A X wave can be interpreted as a connective wave as it connects 2 simple corrections. In the Elliott Waves Theory, there are two types of corrections, complex ones and simple ones, with the complex corrections being made up of simple corrections that are joined by a further corrective wave, which is known as the X wave. It is vital for a trader to understand when an X wave is forming in order to gain a grasp on complex corrections.
When identifying a strong X wave, it is important to watch out for the 61.8% retracement level as compared to the previous correction. To do this, a trader should use the Fibonacci retracement tool to measure the first correction’s length (the first correction may be either a flat or a zigzag pattern, but never a triangle as these cannot be the first corrective wave of a complex correction). The X wave should end above the 61.8% retracement level and if it does, a trader should then look out for a 2nd correction, which will often be a contracting triangle. By the time this triangle has been broken, the trader can trade a binary option in the same direction that the triangle broke in.
This forms the signal that the complex correction with a strong X wave has now been completed and the old trend will resume in the direction of the impulsive move which occurred before the complex correction.
The Characteristics of X Waves
The idea of a X wave can be tricky to understand as an X wave has two key characteristics. Firstly, they are always corrective and secondly, they will connect 2 or more simple corrections. However, it is possible for a complex correction to form with either one X wave or two at a maximum, and the correction type will be given by the X wave’s length. Should the X wave end at more than 61.8% it is a large wave and traders should then consider trading this as the implications of any market action in the future are very different to a correction that has a small X wave.
When talking about strong X waves, they virtually always represent a complex correction rather than a simple one, and often it will be either a triple or double zigzag. The 61.8% level is the minimum level which can be broken as if the market reaches so far, it is likely thqat the move will be completely retraced, going beyond the 100% retracement level.
As the market will spend the majority of its time in a consolidation area, forming ranges, complex corrections are commonly found and therefore a good understanding of the ways in which they form and their implications gives a trader a good competitive advantage.
When do Complex Corrections with Large X Waves Form?
A complex correction that has a large X wave is able to form as either the 2nd or 4th wave in a classical impulsive move, with the 2nd wave being the most likely.
To identify the possibility of a complex correction forming, a trader must measure the first wave’s length using the Fibonacci retracement tool. Should the retracement go further than 61.8%, it is most likely that the market will form a complex correction and a strong X wave. This is because the 2nd wave is unlikely to end beyond 61.8%.
The following X wave will therefore be a stronger move to the opposite direction. Should the large X wave travel beyond the 100% level, the market is most likely to be forming a running complex correction together with a strong X wave. This is usually followed by a 3rd wave with an impulsive move of a bigger degree.
Should the complex correction form on an impulsive move’s 4th wave, it is unlikely the market will form a running correction and instead it is likely to be a triple or double three.
Other educational articles
- Using Fundamental Analysis in Binary Options Trading
- Is It Possible to Successfully Trade a Flat Market in Binary Options Trading?
- Elliott Waves – The Implications Of A Running Correction To Reduce The Risk Of Painful Trading
- Elliott Waves Analysis Really Works – Complex Corrections Patterns Included
- Finding The Right Striking Price Using Fibonacci Levels Is Key In Successfully Trading Binary Options
- What is the Trend Following Binary Options Trading Strategy?
Recommended readings
- “Market valuation and merger waves.” Rhodes‐Kropf, Matthew, and Steven Viswanathan. The Journal of Finance 59.6 (2004): 2685-2718.
- “Stock market multi-agent recommendation system based on the elliott wave principle.” Tirea, Monica, Ioan Tandau, and Viorel Negru. International Conference on Availability, Reliability, and Security. Springer Berlin Heidelberg, 2012.
