Elliot Waves Strategy
Elliot Waves Strategy for Binary Options Trading
I will be honest. I did not know much about Elliot Waves before I began this review. I assumed, wrongly I might add, that they were a technical tool similar to using multiple moving averages. Boy was I wrong. Just shows you that what they say about assuming things is true. In reality Elliot Waves are a strategy that targets upcoming corrections in bull markets. The strategy is based on the Elliot Wave Principle, a detailed explanation of how mob mentality works as described by Ralph Nelson Elliot in his book, “The Wave Principle”, published in 1938. The theory and the book are very complex but basically lay out the nature of crowds, mob mentality and how changes in mass sentiment create patterns that are measurable and predictable. The theories he presents are well suited to the financial markets and have been included as a pillar of technical analysis ever since first publication. My conclusion: Elliot Waves are a method of trading above and beyond either tool or strategy the way Shaolin, Jujitsu and Karate are forms of martial arts. To embrace Elliot Waves, to become an Elliotician, is life long pursuit.
How Elliot Waves work?
There are basically 2 kinds of waves, each divided into smaller sub waves. The primary waves are the Impulse Wave and the Corrective Wave. Each Impulse Wave is then followed by a corrective wave. During the Impulse Wave there are 5 sub waves in each movement; in the case of a bull market there are 3 up waves punctuated by 2 smaller down waves. Corrective waves each have 3 smaller sub waves; 2 down waves and one up wave. As each wave unfolds targets for the next wave can be predicted.
Here are two illustrations to help clear up the basic 5-3 concept of market movements.
Figure 1. Elliott Wave Basic 5-3 Pattern
From the above illustration you can see the general pattern that markets follow. The trend moves up in 5 waves and then corrects in 3–labeled A-B-C. But remember, this is happening on all time frames at the same time, from a tick chart all the way up to yearly and decade charts (and longer). The next illustration shows how this plays out.
Figure 2. Fractal Nature of Markets
A 5 wave pattern creates Wave 1 on a larger time frame. This is followed by a 3-wave correction which creates Wave 2 on that larger time frame, and so on. The 5-3 patterns on a shorter time frame are the building blocks for longer-term 5-3 patterns.
Each wave within a sequence will also fall into the same basic structure. Let’s take a look at a bullish impulse wave for example. Each bullish impulse wave consists of 5 waves. Three up waves and two corrective down waves. Each of the three up waves will also consist of 5, much smaller, sub waves. Likewise, each of the two corrective waves in the greater impulse wave will also consist of three smaller sub waves; two down and one up. Using this method it is possible to use Elliot Waves in greater and smaller time frames, getting an idea of where the market is positioned in terms of secular waves, primary waves, secondary waves and on down to the nearest terms.
Learn Elliot Wave Binary Options Strategy (part-1)
Elliot Wave Binary Options Strategy (pert-2)
Trading Rules of Elliot Wave Binary Options Strategy
You may look at a price chart, and notice that markets rarely move in such a well defined way as the illustrations above depict. It’s never quite that easy. The two main problems traders face when they begin using Elliott Wave, and start labeling their charts accordingly, is that A: they either don’t see these patterns at all, or B: they think they see them everywhere but are labeling them all wrong.
While this is article is by no means a full explanation of Elliott Wave analysis, here are a few rules to help label these 5-3 waves.
- Wave 2 never moves beyond the start of Wave 1
- Wave 3 is the never the shortest wave; it must be longer than either Wave 1 or Wave 5, or both.
- Wave 4 never enters the price territory of Wave 1 (in highly leveraged markets you can allow a slight overlap).
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.
- Elliot Waves might suck because it is a complex theory to master.
- Finding the actual start of an Elliot Series could prove problematic for newbies and lead to some frustrations.
- Not to mention that the overall analysis is highly subjective once you do have a starting point.
- It will take time to fully understand and be able to use this strategy but what successful trading strategy doesn’t?
- Elliot Waves do not suck plain and simple.
- It is an advanced strategy based on market psychology and mob mentality that is highly intuitive.
- Much like Fibonacci trading this method is a discipline that will take time to fully master but also one that you can use on a daily basis.
- The break down of the waves is also very similar to Fibonacci trading and provides highly accurate target levels at which signals are likely to occur.
- Not to mention that once you get into the groove of trading the waves you will be able to break down the smaller waves into smaller waves and get more and more profitable entries.
The bottom line
Elliot Waves are a way of life and a discipline within trading that sets it apart from the norm. While complex, the theory is straightforward and once mastered will provide a lifetime of successful trading. The caveat is that it is a strategy and method of trading that will take some time to master and may not provide he instant gratification that simpler approaches can give. In the end I am impressed with the system and the theory and think it is a great way for new traders to begin studying the markets as well as a way for experienced traders to enhance their current analysis techniques.
If you explore further, you’ll find that Elliott Wave can provide profit targets, estimate market turning points and provide a context for all other price movements you see on a charts–such as a triangle or a trading range. You’ll also learn other patterns, such as extensions, diagonals and the multiple forms that corrections can take.