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Elliott waves theory is made of different cycles. These cycles show different waves of different degrees that are part of the way a currency pair is moving.
The theory has been developed in the way the stock market is moving. Elliott discovered that a market moves because of human behavior.
This is the reason why the theory is so powerful: it shows the human element in trading. Imagine you trade with an indicator, like an oscillator.
Overbought and oversold levels are spotted easily with the help of an oscillator. The problem is that retail traders still lose money even though they are buying oversold and sell overbought levels.
It means that something is wrong with that approach. The market moves differently and for different reasons.
One way to deal with the problem is to understand the market participants. That is, who is responsible for the moves a financial product is making?
In the case of a stock price, supply and demand are key, together with dividend dates, mergers and acquisitions news, and so on. In the case of the Forex market, things are different. Retail traders represent only about 6% of the overall Forex transactions on any given trading day. The rest belongs to big players, like commercial banks, central banks, liquidity providers, and even other Forex brokers that take the other side of their clients' trades.
This makes the Forex market different than other markets. But the Elliott Waves rules are the same. It only means that on the Forex market, some rules are to be met more often than on other financial products.
The Forex market is full of corrective waves. Even if you think an impulsive move unfolds, it is most likely that it is part of a corrective wave (either wave a and c of a zigzag or the c-wave of a flat).
But even these corrective moves are not simple, but complex corrections. As a rule of thumb, a complex correction is formed of two or three corrective waves, connected by an intervening wave.
This intervening wave plays the role of an x-wave. It connects the two or three corrections.
If there is a flat as the first correction and a triangle as the second one, in between there must be something to the same degree. This is the x-wave. The x-wave is also called a connecting wave, as it connects two or more corrective waves. It is not possible to have more than two x-waves or two intervening waves in any complex correction.
The chart above shows a triangle. Triangles are the most common way for a market to consume time and form extremely often on the currency market.
There are two different cycles showed with different colors: the pink one is the cycle of a bigger degree and the green one is the cycle of a lower degree.
All the legs of a contracting triangle are corrective waves, which makes the e-wave in magenta to be corrective too. A closer look at the inner structure of the e-wave in magenta shows an x-wave of a lower degree.
The idea of this x-wave, or its role, is to connect two waves. The first a-b-c in green (a zigzag) is connected by the next a-b-c-d-e (a triangle of a lower degree). Together they form the e-wave of a bigger degree.
The green structure is called a double combination because the x-wave connects two waves of different structures, but of the same degree: a zigzag and a triangle.
If the corrective waves connected by the x-wave are different, a combination forms. If they are the same (like two zigzags or two flats), a double zigzag or double flat forms.
The maximum degree of complexity is reached when there are two x-waves in a complex correction. There are many rules that need to be respected for a triple correction to form, but in the Forex market, they are extremely often.
As an intervening wave, the x-wave is a corrective wave on its own. It can be complex or simple, but a corrective wave nevertheless.
This makes counting a complex correction a difficult task. Imagine a triple combination with the following structure: a flat, a zigzag and a triangle.
Three simple corrections need to be connected by two x-waves. There is one x-wave that follows the first two simple corrections.
In a flat, waves a and b are corrective, and only the c-wave is impulsive. In a zigzag, waves a and c are impulsive, and the b-wave is corrective.
In a triangle, all the waves are corrective (a-b-c-d-e). When adding the waves, out of eleven waves, only three are impulsive, and the rest corrective.
Add to these corrective waves the two intervening waves (which are corrective as well!) and you’ll have ten corrective waves in a complex structure with two x-waves. It is obvious now why the market spends most of the time in consolidation, or in complex corrections.
Speaking about complex corrections, like a double or a triple combination, it is not possible for it to start with a triangle. It leaves us with only two possibilities to form at the start of a complex correction: a zigzag or a flat.
Therefore, the x-wave follows either a zigzag or a flat formation. This is an important clue that allows Elliott Waves traders to have an idea where the market is and what the next move will be.
To sum up, an x-wave is an intervening wave or a connecting one. It connects two or more simple corrections.
Together, the simple corrections and the x-wave form a complex correction of a bigger degree, or a bigger cycle. X-waves are corrective waves too, which makes the counting more complex than counting an impulsive move.
X-waves are very common on the Forex market. Currency pairs move aggressively ahead of the important economic news and in between, they range a lot. It means corrective waves or corrections are more common than impulsive waves. This makes understanding the role of an x-wave a crucial thing in understanding how Elliott Waves theory is applied.