One of the core elements of Elliott Wave Theory is the 5-3 wave cycle. The first part of this cycle—the 5-wave structure—is known as the impulse wave, and it moves in the direction of the primary market trend.
📈 What Is an Impulse Wave?
An impulse wave consists of five distinct sub-waves:
- Waves 1, 3, and 5 are motive waves that follow the main trend.
- Waves 2 and 4 are corrective waves, moving against the trend.
⚠️ Don’t confuse Waves 2 and 4 with the ABC corrective pattern (explained later).
Here’s a breakdown of how each wave typically behaves, using a stock market uptrend as an example. The same logic applies to forex, commodities, and crypto markets.
🔹 Wave 1: The First Spark
- This marks the end of the previous trend and the beginning of a new one.
- If the previous trend was bearish, Wave 1 will push prices upward.
- Driven by a small group of traders who see value at lower prices and begin buying.
- It’s often hard to identify at first, as most traders are still influenced by the previous trend.
🔹 Wave 2: The First Pullback
- Price retraces some of Wave 1’s gains.
- Traders who entered early take profits, causing a dip.
- Importantly, Wave 2 never retraces the full length of Wave 1.
🔹 Wave 3: The Strongest Wave
- Typically the longest and most powerful wave.
- Momentum builds as more traders recognize the trend change.
- Fundamentals or news may support the move, driving price higher.
- In bullish markets, this wave sees rapid acceleration.
🔹 Wave 4: The Cooling-Off Period
- A temporary correction after the strong move of Wave 3.
- Traders take profits, but buy-the-dip sentiment keeps prices from falling too far.
- This wave tends to be shallow and tricky to identify.
🔹 Wave 5: The Final Push
- The last leg of the trend, often driven by retail trader enthusiasm or hype.
- Prices surge as market euphoria kicks in.
- Often marks a market top, and experienced traders may begin preparing for reversals.
🎯 Key Takeaways:
- Impulse waves form the foundation of trend movement in Elliott Wave Theory.
- Wave 3 is usually the most powerful.
- Wave 5 often signals the end of a trend before a larger correction (ABC) begins.
Understanding impulse waves helps traders:
- Spot trend beginnings and potential reversals.
- Improve trade entries and exits.
- Align with market sentiment at different phases of a trend.
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