What is Elliott Waves Theory?

One of the most popular way to trade markets is the Elliott Waves Theory. Actually, it is more than a way to trade market, it is a way to analize markets and make a forecast based on the result.

A regular trade setup should have a take profit and a stop loss and Elliott Waves Theory allows you to do that. However, trading binary options is a bit different than trading the currency markets but the analysis made with Elliott should be the same. According to Elliott, a five wave structure should be corrected with a three waves move. The waves that are advancing in a five wave structure are called motive waves, or impulsive moves, and the waves that are corrective are called, of course, corrective waves, or corrections.

Cycles and Super-Cycles in Elliott Wave Theory

Elliott wave theory allows the trader to divide the market into cycles and super-cycles and this allows for counting the waves. Impulsive moves are always being labeled with numbers (1-2-3-4-5) while corrective waves are always being labeled with letters (a-b-c). The most common corrective waves are flats, zigzags and triangles, but on complex corrections market is making combinations of those simple corrections and the result may be a double or triple flat, a double or triple zigzag, triple or double combination, etc.

Trading with Elliott Waves Theory is something that many people know but few master. The reason for such a difficulty when it comes to counting waves comes from the sub-divisions of each and every wave and in the end the trader is at a point in time where it doesn’t know anymore what cycle is there. In order to avoid such difficulties or to make its life easier, a trader should stay disciplined and avoid lower time frames. In other words, the way to go is to do a so called top/down analysis and this one implies all the time that the first time frame to start from is the monthly chart. After that, the weekly, daily, four hours and the hourly charts are mandatory but only starting from the point in time where the analysis on the previous charts ended.

Top Down Analysis Discipline

This is called a top/down analysis and it represents the way to stay disciplined when trading with Elliott Waves. There is also one thing that makes trading binary options more difficult with Elliott Waves: the fact that one cannot use pending orders like it is possible when trading FX. This may be a drawdown when analyzing markets but it represents also an opportunity as it avoid over trading which is the main problem when trading the FX markets.

Another advantage when trading binary options with Elliott Waves Theory is that this trading theory is allowing one to find strong support and resistance areas and it is well-known what to do next: buying call options in support areas and put options in resistance areas is the name of the game.

Understanding the Patterns in Elliott Wave Theory

Elliott Waves Theory means looking at patterns that happened on the left side of the chart and trying to project or to forecast the next move on the right side of the chart. Therefore, knowing those patterns is vital key for what to look for on the right side of the chart. Such patterns are most likely to be triangles as they represent the favorite way market is consolidating and triangles can be contracting and expanding. It is difficult to properly identify a triangular formation on the smaller time frames, but can be done on the bigger ones.

For example, complex corrections are almost always ending with a triangle so by the time the triangle is breaking its b-d trend line it means the correction is completed and most likely an impulsive move should follow. If the correction was bullish, then put options should be traded as the move to follow should be a bearish impulsive move, and of course if the correction was bearish, then call options should be traded as the move to follow should be a bullish impulsive move. Moving forward and knowing an impulsive move coming, then the most common impulsive move is the one that has the third wave being the longest so waiting for waves one and two to complete before buying an option to meet the third wave requirements should be key. In this case, because third waves represent fast moves, short-term expiration dates can be traded.

The above are just a couple of examples regarding how Elliott Waves Theory can be used when trading binary options but in reality there are plenty of opportunities as corrections are both simple and complex and impulsive moves are subdividing themselves as well.