Impulsive waves are the most well-known term when somebody is referring to the Elliott Waves Theory. When trading, there are a lot of strategies/theories to use and each and every trader needs to actually find his/her edge when trying to identify the proper way to trade. In the case of Elliott, there is no trader in this world that actually didn’t hear about an impulsive move at least once in the trading life time and the reason for that is the fact that the theory is quite popular, not to mention profitable if respected thoroughly.
An impulsive move, or a motive wave as a matter of fact, is a five wave structure that has at least one extended wave and the extension refers to the longest wave in the five wave structure. This longest wave should be at least 161.8% when compared with the next longest wave in the sequence and this is important as without this condition a move is not impulsive.
Identifying Impulsive Waves
Knowing how to identify an impulsive move is crucial because of the third wave in the structure. This is because the third wave is almost always the longest one, or the extended one, and therefore price is moving quite aggressive at that very moment of time, making traders to want to be in that move as quick profits are the name of the game.
An impulsive move has five waves that should be labeled with letters and the key here is to buy call options ahead/during the third wave and at the end of the fourth wave if the impulsive move is in an uptrend, respectively to buy put option if the impulsive move is in a downtrend. The impulsive move is the holy grail among traders of any type as this is when the market is moving the fastest and quick moves should bring quick profits. I agree, with one big add-on, in the sense that the time frame is always needed to be considered.
The Problem with Impulsive Moves
If the impulsive move comes on the daily chart for example, then after the extended wave is completed, market needs to correct and correction implies a move in the opposite direction. Because the time frame is quite long, than this means the option may expire out of money is the time frame is too short. An impulsive move have a five wave structure, no more, no less, and it is always labeled with numbers (1-2-3-4-5). The problem with impulsive moves is that two of those five waves, namely waves 2 and 4, are corrective (meaning they move in the opposite direction when compared with wave 1, 3 and five.
In other words, if waves 1,3 and 5 are bullish, or price is moving to the upside, the 2nd and the 4th waves area bearish, so price is moving to the downside, in the opposite direction, like mentioned a bit earlier.
That being said, trying to buy call options on expectations that wave 1, 3 or 5 should start is the way to go, while looking for a put option on expectations of a 2nd or 4th wave to form is also the case. A binary options account can be hedged as well as hedging is being done by trading different options on one hand and also by trading different expiration date.
Longer Term Expiry with 1st, 3rd and 5th Wave
In other words, during the five waves structure to the upside that started on the, say four hours chart, one can trade end of week or even end of month call options, but also, on the eve of the 1st, 3rd and 5th wave ending put options can be traded with a shorter expiration date. Because the put options would be more risky, it is advisable that they are having a smaller investment than the call options as in the end the primary trend should prevail.
Impulsive move are always being followed by a correction, namely by a simple a-b-c or a complex one. It is the nature of this correction that makes them really difficult to offer a nice striking price for a put option after a bullish impulsive move as there are also running corrections.
This means that while market is forming a corrective wave, in reality the move is still to the upside and bears are going to be trapped. In any impulsive move one wave should be bigger, to stand out of the crowd, and the most common setup is for the third wave to be the biggest one. This makes the Elliott Wave trader to obsessively look for the third wave as that is where the quick buck is going to be made.
However, that being the most common setup it doesn’t mean other waves cannot be the longest ones as well as the first and the fifth can extend as well.