Simple Corrections with Elliott Waves
Elliott Waves principle is fairly sound and simple as it takes into account five waves in a structure that is corrected with another three waves. Out of those five waves, two of them are corrective.
According to Elliott, corrective waves can appear as 2nd and 4th waves in an impulsive move, waves a and b in a flat pattern, as well as waves a,b,c,d,e in a triangle. As you can see, there are not many other possibilities so from this point of view things are pretty straight forward.
However, things get a bit more confused as corrective waves, namely the above ones, can be simple or complex corrections.
What is a Simple Correction?
In a simple correction, for example wave a that follows a five waves structure can be formed out of a simple correction, namely a,b,c of a lower degree.
A complex correction means that instead of a simple a,b,c structure market is forming more than one corrective wave of a lower degree, and in this case an x wave, or an intervening x wave appears to the equation.
From my point of view the more important thing in trading with Elliott Waves is to know the waves structures and to know the degree/cycle one is counting.
A classical five waves structure is labeled with numbers and should be followed by a simple a-b-c, or a correction. The key here stays with the a-b-c, weather it is a simple or a complex correction. Most of the times though markets are forming complex corrections as they have the tendency to spend more than 65% in ranges and this means notions like triangles (contracting or expanding), zigzags or flats are to be found most of the times and not impulsive moves.
This may came as a surprise as traders that are using Elliott Waves Theory to analyze markets are hunting the third wave in an impulsive move as that is the move market should travel the fastest. However, most of the times that is only part of a complex correction with a large x wave.
Principle of Alternation
Because of the principle of alternation when it comes to Elliott Waves trading, if the second wave is a simple correction that respects all the rules of a simple correction, then the fourth wave most likely is a complex one. This means that if we want to buy a call option while market is in a complex correction we should look to pick a bigger expiration date when compared with what an expiration date from a simple correction.
When a triangle is acting as a simple corrective wave, it is worth mentioning that this can be possible only in wave b of a zigzag or wave 4 in an impulsive move, and in both cases price action to follow should be limited both in price and time as there is not much room market will follow until the end of the triangle is going to be revisited.
In other words, if you are seeing a triangle as a fourth wave, then it is recommended to trade a put option after the triangle is broken to the upside (in a bullish impulsive move) and market makes a new high when compared with the highs in the third wave, as price will have the tendency to move lower a new high is being made. The same is valid on a bearish impulsive move of course.
Where to be Found?
Simple corrections are to be found in any second or fourth wave, but also in any leg of a contracting triangle as part of a complex correction that in the end will form the entire leg of a triangle.
It is important to know that the difference between a simple and a complex correction is being given by the intervening wave, which is being labeled the x wave. The length and nature of the x wave is also offering us a bunch of clues on the nature of the complex correction market is in.
Elliott Waves theory is a sum of scenarios that are being built based on what market did on the left side of the chart in order to project price action and patterns on the right side of the chart. By the time one pattern is confirmed as being a simple or a complex correction, we can safely trade a put or a call option with an expiration date strongly dependent on the time frame the analysis is being made.
The two video recordings that are coming with this educational material have the purpose of showing you the rules of a simple correction, what are they and how market can interpret them in order to find out striking prices for binary options trading.