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The principle of the Elliott Waves Theory is based on a five wave structure which is corrected by a further three waves. Out of the 5 waves, two will be corrective, and, according to the Elliott Waves Theory, the corrective waves will be the 2nd and 4th waves of an impulsive move, the A and B waves of a flat pattern, and the A, B, C, D and E waves of a triangle. There are few other possibilities, and therefore this is a fairly straight forward concept to grasp. However, it becomes more confusing, as all of those corrective waves may be either a complex or a simple correction.
For example, an A wave which follows a 5 wave structure may be formed from a simple correction which is A, B, C of lower degree. Instead of the simple A, B, C structure, in the case of a complex correction, the market forms more than 1 corrective wave in a lower degree such as an X wave or intervening wave.
When trading using the Elliott Waves Theory, it is important to be familiar with the wave structures and to be aware of the degree and cycle that is being counted.
Classic 5 wave structures are labelled with numbers and will be followed with a simple correction or A, B, C. Usually, the market forms complex corrections so both expanding and contracting triangles, flats and zigzags are most frequently found rather than impulsive moves.
This may surprise those traders who are analysing the market using the Elliott Waves Theory as often the third wave of an impulsive move often turns out to be just part of a complex correction that has a large X wave.
The Principle of Anternation and Elliott Waves Theory
When trading using the Elliott Waves Theory, the Principle of Alternation comes into play. If the 2nd wave turns out to be a simple correction, the 4th wave must be a complex one. Therefore, if a trader wishes to purchase a call option if the market is showing a complex correction, they should choose a bigger expiry date and a shorter expiry date in the case of a simple correction in the market.
If a triangle is acting as a simple correction wave, this is only posssible in the B wave of a zigzag or the fourth wave of an impulsive move. In both of these cases, the price action that follows should be limited in time and price as the market does not have much room left before the triangle’s end will be revisited. So if the 4th wave is a triangle, a trader should trade a put option once the triangle has broken to the upside in the case of an impulsive bullish move.
A simple correction can be found in any 2nd or 4th wave and also in any of the legs of a contracting triangle which is part of a complex correection that will eventually form the complete leg of a triangle.
How to Find the Difference Between Simple and Complex Corrections
The difference between complex and simple corrections is shpwn by the X wave or intervening wave, with the nature and length of this X wave giving the trader many clues about the type of complex correction that the market is displaying.
Once an observed pattern has been confirmed as a complex or simple correction, it is safe for a trader to place either a call or put option with an expiry date that is dependent on the time frame on which the analysis is being carried out and therefore to achieve greater success in their binary options trading venture.
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