Most experienced traders are aware that one of the characteristics of an impulsive move is the fact that it will have at least one wave which is bigger, when compared to its next longest wave, than the 161.8% extension. All 5 wave structures have at least one extended wave and between advancing waves, the ones which are most likely to be extended are, in order, the third, the first and then the fifth.
When participating in binary options trading it is important to know how to execute trades when the impulsive move’s first wave is the longest and is therefore a first wave extension.
In a 5 wave structure, as you might expect from its name, the extended wave is the first and longest one. When this occurs, the market is said to be forming a 1st wave extension impulsive move. There are 2 varieties of impulsive moves that have a 1st wave extension and they can only be differentiated by observing whether or not overlapping is present between them.
If there is overlapping evident on the technical analysis chart, the first wave extension impulsive move will only be formed from corrective waves, meaning that in the 1-2-3-4-5 structure they are all corrective waves. This pattern is also often known as a triangle or wedge which appears at the end of a bigger degree move.
Identifying the Differences Between the Two Types of Impulsive Moves
If this happens to be the case, the key to successfully trading binary options is to find out if the wedge is falling or rising. As all expert investors know, a rising wedge is actually falling and therefore put options should be bought, whereas a falling wedge is actually rising and therefore call options ought to be purchased for most effective results.
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A trader should draw the 2-4 and 1-3 trend lines to show the boundaries of the wedge. The key trend line is the 2-4 one as this shows the investor the ideal striking price for their chosen option, If there is a break across the 2-4 trend line, it will usually be retested and this is the point at which the trader ought to step in and purchase call options following a falling wedge or put options following a rising wedge.
This pattern usually appears following the end of a bigger degree wave, and usually it will be the 5th wave of a 5 wave impulsive move or alternatively a C wave in a zigzag or flat a-b-c structure.
On the other hand, if there is no overlapping present, the wedge cannot be treated in this wave as it is likely that the first wave extension will only be the first impulsive move of a larger degree.
In this instance, a Fibonacci retracement tool should be used to measure the entire length of the 1st wave and the 23.6% and 38.2% levels of retracement should be identified. The investment amount should then be split in two in order to have the correct striking price and the expiry date should be adjusted within the time frame on which the pattern is developing. This is vital to achieving success with both options.
Finding the Correct Retracement Levels
In this type of pattern, the wave structure is also important as the 2nd wave is more time consuming while the fourth has a simpler structure and is less complex than the second way. These all give clues about the expiry date and the striking price. During an impulsive move, one wave at least has to be much larger when compared with the other 2 waves that travel in the same direction. There are several extension types and first wave extensions are not the ones that are most commonly spotted, however they do appear frequently, and therefore having a good understanding of how to identify them and how to trade them is very important for successful trading.
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- “How to use Fibonacci retracement to predict forex market” (PDF) scientificpapers.org
- “Evaluation and Extension of the Gann Swing Trading Rules” (PDF), Qiuru Fu, CCFEA