Traders often try to identify and use the information that they can derive from corrective waves as this can be very helpful in knowing when to execute a binary options trade.
Elliott Waves Theory is used by many experienced investors to analyse patterns in the technical charts and according to this theory, a motive wave is formed from 5 different waves, corrected by 3 different waves. Each of the five impulsive waves is also formed from five small waves of a lower degree and every one of the three correctives waves is also formed from three waves of a lower degree. This makes this theory quite complex to grasp. Corrective waves can be simple (like triangles, zigzags or flats) or complex (such as triple or double combinations or double three runnings etc). From all of these, the most commonly observed of the complex structures is the double combination.
How to Identify Double Combinations on a Chart
Double combinations are one of the most complex corrective wave types, which are formed as either a 4th wave or 2nd wave type. Sometimes, they are even x wave types. As might be guessed from their name, a double combination wave is formed from two different corrective waves, which can either be a zigzag and a flat or a contracting triangle and a flat. The two corrective waves are linked with another corrective wave which opposes the current connection, making it go with the previous trend. Usually, it is a simple corrective wave and it is referred to as an x wave. Although some investors believe that a double combination is a relatively rare occurrence, in fact if you pay close attention to technical charts you will discover that they do occur much more frequently than you might suppose.
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Usually, double combinations will be found between a contracting triangle and a flat. One which ends in a contracting triangle is actually the most commonly found, with a double combination ending in a zigzag being the least commonly seen. It is also possible to find a double combination which is the complete leg of a contracting triangle, usually on its first leg.
Double Combinations in Both Simple and Complex Corrective Waves
It is important, when considering double combinations, to understand how corrective waves form. There are two varieties of corrective waves: complex and simple. As might be derived from its name, a double combination is made up of 2 simple corrections connected with another corrective wave which has the same degree, going in the opposing direction of the main corrections.
Usually, the intervening or connecting wave will be a simple correction however it may be a complex one. What is more important for traders to note is that the move follows this pattern and these factors must be borne in mind:
- Each analysis should begin from the time frame that the analysis is made, as the expiry date must be adapted according to the time frame being considered.
- If a trader identifies a 5 wave structure and then the move which follows the impulsive move is a double combination, they should then trade options in the opposing direction as usually, the market will reverse beyond the 61.8% level.
- The first correction of the double combination will never be a triangle.
These factors will help an investor to identify a double combination correctly.
Double combinations are in the same category as triple combinations, although they differ by having three corrective waves connected by two x waves rather than two corrective waves.
Although it can be difficult to assess when a double combination has finished and whether or not it will become a triple combination, the answer can be found by analysing the patterns of the lower degree waves.
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