Fibonacci with Elliott Waves Patterns – X Waves

The Concept of an X Wave

One of the most interesting waves in the Elliott Waves Theory is the “X wave”. To be honest, I even like the name of it. It is so tricky and deceiving, that sometimes we can only guess where is it actually starting or when/where it is actually ending.

But I guess this makes it so beautiful.

The X wave has a major characteristic: it connects two or more corrective waves of the same degree. For example, if you have two zigzags in a complex correction, the whole pattern is called a double zigzag and the two zigzags are connected with another corrective wave: the x wave.

Large or Small X Waves

X waves can be part of corrections with a small x wave or corrections with a strong x wave. The difference between the two patterns is given by Fibonacci retracement. Which one? The all-important 61.8% or the golden ratio as it is also called.

Based on it we can make a difference between different correction types and we can find the right striking price for our option.

The concept of an X wave is one of the most difficult to be understood by market participants as one is not really knowing if market is forming a simple or a complex correction. In a complex correction the X wave is a must, but in a simple one there is no need for one and the market is starting the new wave.

As a rule of thumb, the X wave is always a corrective wave, and based on the correction that comes before it, it can be a simple correction or a complex one on its own. It should be mentioned here that most of the times it is a simple correction, like a triangle, a zigzag or a flat pattern.

The way to trade X waves is to look for them to be confirmed by markets, in the sense that if the X wave is a simple correction then certain conditions need to be met for the price action to come. It all comes to the 61.8% level, yet again, as the golden ratio is once again decisive. When it comes to Elliott Waves and the patterns possible to be formed, the golden ratio is key.

Tips and Tricks

The tricky part is that this time the retracement level should be calculated taking into account the whole length of the previous corrective wave prior to the start of the X wave and this is tricky if one is considering that we can talk about a flat, zigzag or even a triangle. It depends very much where the previous correction ends in order to correctly find out the 61.8% level.

One more thing to consider is the fact that it is mandatory for the X wave not to end above the golden ratio. However, parts of the X wave can move beyond that area but the end should not.

Market is always moving in impulsive waves, or five wave structures that are being followed by a correction, or a three wave structure. But it is vital to know that also the impulsive wave has two corrective waves of the same degree, namely the second and the fourth wave. If one is simple, the other one must be complex, and the other way around and therefore the presence of an X wave is mandatory.

It is being said that the X wave is a connective wave and I would say that this is definitely very much true. It is connecting two corrective waves or even three. For example, if there is a flat pattern to the downside and a counter move starts and market makes a new low, then it is most likely that a new correction started, a simple one that can be either a flat, a zigzag or a triangle on its own.

Using Fibonacci to Find out the Type of the X Wave

The way to trade the X wave is to look at the first correction and then draw a Fibonacci retracement level to see where the 61.8% retracement comes. Let’s assume the first correction is a flat pattern that moves to the downside. By the time the 38.2% retracement level is reached, a put option can be traded taking into account the time frame the pattern is formed in order to set the right expiration date. However, the investment here should not be big in the sense that the aggresivity in trading should increase by the time market is moving closer and closer to the to the 61.8% level, with the fifty percent being another level to deploy a more aggressive put option.

I will end up with insisting that the X wave is a concept that is difficult to understand but from the moment all is clear, great trades can result from a simple or complex X wave.