Double Combinations

Trading with the Elliott Wave theory is not an easy thing as looking at the waves structure and actually trying to label them creates confusion most of the time. However, if the rules are respected and the trader possess the proper knowledge level, things start to clear up and moves markets make tend to make sense. If markets are a sum of human behavior then there is no other theory out there to illustrate this better then the Elliott Wave theory.

            Corrective waves may have different interpretations as they can be simple or complex, and one of the most difficult thing to do is to differentiate between the cycles the market makes. For example, one may look for a corrective wave, that should come in the form of a three (a-b-c), but this may be a zigzag or a flat. If the b wave out of those three waves retraces more than 61.8% of wave a, then we have a flat and therefore it is forbidden for that a wave to have other structure than a three waves structure, but, of a lower degree.

            And this brings us to our subject here: double combinations. What if that flat (or zigzag) is ending, price breaks higher (if the move is to the downside) but fails to make a new high and resumes the initial move and breaks the lows? This is  a complex correction wave and double combinations are common here.

            A double combination is formed out of two different corrections that are being connected by an X wave. The X wave should be corrective as well, it can take any shape possible, and can be simple or complex wave. It is usually a simple correction though and its main characteristic is the fact that it corrects the move of a lower degree (the first correction the double combination makes).

            The x wave can connect two different corrections and the combination between the two can vary, but the most common one to be found (especially on the currency markets) is the one that ends with a contracting triangle that acts as a reversal pattern. For example, if the whole correction is to the downside and price forms at the end of it a contracting triangle that breaks higher, then this is most likely to be a double combination. The chart below shows such a pattern we currently had on the eurjpy hourly chart and, as you can see below, the first correction is a zigzag, followed by an x wave (that takes the shape of a flat) and ends with a contracting triangle that acts as a reversal pattern.

            All these three elements highlighted in the picture above (zigzag, flat, contracting triangle) form the double combination pattern. You might ask ok, so where is the catch? What does it mean? Well, given the fact that this is a three waves move, it implies at least 61.8% out of the whole move should be retrace, if not all the move. Depending on the structure price makes on the higher degree cycle, this may be a flat (3-3-5 for a-b-c red in the picture above) and now price is mandatory to go to the 61.8% to complete the b wave red.

            In conclusion, while such patterns frustrate traders most of the times, a clear understanding of them gives great opportunities to be on the right side of the market. Do not forget that this strategy can be the basis for ladder binary options strategy.