Elliott Waves – Trading 5th Waves Extensions Impulsive Moves
In order to move forward, we should briefly focus on an impulsive move. We must know what it really is, before we engage in the fifth wave extension. According to the Elliott, the impulsive move is a five wave structure in which at least one of the waves is extended. Therefore, to extend the biggest wave in the structure, the wave should be more than 161.8% larger in comparison with the next longest wave.
The most conventional example is for the third wave to be 161.8% bigger than the first wave. In spite of this, this is not an obligatory situation since the other two waves are also able to extend.
The trade of binary options means that primarily one should take into account the time frame in which the analysis was made as well as the setting of the expiration date based on that respective time frame.
What is the Fifth Wave Extension?
Therefore, when it comes to the fifth wave impulsive move, the outcome of the pattern should be bullish if it is a bearish impulsive move, and also bearish in the case of a bullish move.
The reason and explanation for that lie in the fact that market is continuously retracing 61.8% of the fifth wave, more often than not this comes quite fast.
For that reason identifying an impulsive move with a fifth wave extension, one is usually advised to trade call options in case the impulsive move is going downside and put options when the impulsive move is going upside.
There are many ways in which an impulsive move can extend. The most common way is the third wave extension, while the next option would be the first wave extension.
Nevertheless, before we move forward, it should be pointed out that with the extension we understand that at least one of the waves should be bigger than 161.8% when compared to the other. In addition to that, the 161.8% is, in this case, the minimum, since these extensions can go even beyond this percentage.
How to Identify Fifth Wave Extension?
It is easy to identify it since the fifth wave extension is the least common extension. This implies that the fifth wave is by far the longest wave in the five wave structure. However, by the time market participants understand that it is a fifth wave extension the extended target is already made.
What is then available to the trader if the extension is difficult to trade?
The answer to this question is visible in the price action which follows a fifth wave extension. The price action largely depends on the wave of the bigger degree. The fifth wave extension can show up as the c wave of a flat pattern. For that reason, we can be 100% sure that in most cases it is entirely retraced. Therefore, concerning the time frame of the formation of the extension as well as the way of the impulsive move, then call or put options are able to be traded with a proper and adjusted expiration date.
This means that there is nothing more complicated in trade than the fifth wave extension which should be accepted as a kind of pattern which is every time completely retraced.
It should be mentioned that such extensions are extremely rare. However, in case you believe that the market is forming one be sure to explore all the details of an impulsive move carefully. More often than not, it can be either the double extended impulsive move or the running correction for the second wave within a third wave extension impulsive move. Both of these situations may lead you to develop a wrong idea and eventually to trade a losing option.
The most important element to observe when it comes to the fifth wave extension is the structure of the second and the fourth wave. These two waves can be indicators for potential overlapping, which means that the fourth wave goes in the territory of the second one. If there is no overlapping to be seen between these two waves, then the move which should be followed after the impulsive move needs to have maximum 61.8% retracement. Overlapping, in this case, promises 100% complete retracement.
How to Use It?
The right way to trade a fifth wave extension is to examine the entire way of the price from the start of the impulsive move until the end of the third wave and then calculate 61.8% out of it. The following step is to present the result on top of the third wave. That is the situation which either requires buying put options on a bullish fifth wave extension impulsive move or, on the other hand, buying call options in a bearish fifth wave extension impulsive move. With the way the price is moving either upside or downside from that level, one should make investments and trade as well.
There are many examples of how the fifth wave extension impulsive move looks like can be found online. This can be extremely helpful for new traders. Furthermore, there are many Elliott Waves related articles which can be found in our Binary Options Academy project. This means that in order to understand the concept of these extensions better, and how to apply them to binary trading, make sure to check these out for further instructions.
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