Impulsive and Corrective waves – what can we learn about them from a new Elite CurrenSea guide
Elliott Wave Theory is used to study the mechanism of price action as well as market psychology. Elliott Wave attempts to identify the recurring price fluctuations in the financial markets. The recurring price changes occur as a result of a natural cycle of the crowd’s psychology, which is present across every market.
Elliott Wave rules and guidelines can help you recognize price swings and the appropriate waves. They also help to categorize them into a series of patterns that are meaningful and can be used as a reliable method to predict future price movements. The basic idea behind price-action is that price action occurs through an inexplicably constant alternation of the trending (impulsive or motive energy) or the corrective (correction) cycle, creating this effect on any scale (Fractal).
Elite CurrenSea has produced an amazing piece of work in the form of an extensive guide on EW wave analysis and trading. The guide is broken down into thematic sections that explain various aspects of Elliott Wave theory and its correlation with Fibonacci. Most importantly, the resource masterfully covers the application and detection of impulsive and corrective waves, which we will summarize in the article below.
The idea behind EW corrective and impulsive waves
We will not dive into the depths of the theory to discover every aspect and idea the author came up with because it could require a lengthy journey. Instead, we will present an outline of the system to help our readers on how they are able to apply the concepts, as it will help to choose the right EW charting software. So, you’ll know the fundamental elements in EW theory, however, should you want to be an expert in the field, you should learn the theory as well as the most recent revisions.
Motive Wave Patterns
The guide explains all EW patterns in great detail and provides a graphical representation of each stage of the waves. As we have already mentioned before, Elliott Waves patterns consist of two kinds of waves. The first is the Motive Wave that is composed of five waves. Three of these are impulse waves (waves 1, 3, and five) and two can be described as diagonal waves (waves two and four). Patterns of motive waves may be either downtrend or uptrend.
The initial wave of the pattern has a small rise with only a small number of traders taking part. The pattern is followed by wave two, which is characterized by a brutal sell-off; however , it allows the beginning of another rally, the third wave. The third wave is slow, but once it breaks through the high of wave one, the rally picks up momentum. This is the most active phase in which traders are actively adding positions. The fourth wave is a time of profit-taking that results in a pullback price; however, it is much more organized than wave two. In the previous wave, only a handful of traders who were not able to make the previous movements are now entering the market in order to initiate a new market rally. However, the amount of traders isn’t enough to propel the market and therefore top out at some point.
The downtrend of the motive wave has an identical dynamic, however, it is primarily in the opposite direction. The process begins with wave one that has the weakest sell-off, which involves only a few market participants. In the second wave, the rally is stronger but it still has the potential for an opportunity for a turnaround before starting another selling-off. The third wave is the most active selling that violates the law of wave one and creates the momentum for picking with traders open short positions, or leaving long positions. In the fourth, there is a profit-taking move that results in a major decline in the value of assets. In the final phase of wave 5, there will be a few short-sellers in the market to initiate another decline, however, it won’t be enough to sustain a market rally, and it will eventually come to a halt.
Corrective Wave Patterns
Corrective waves are more complicated than motive waves. Therefore, it is essential to use the best Elliott Wave charting platform not to become confused. The corrective wave pattern is based on these five main waves we have discussed above. It comprises three waves, also called the ABC Corrective Pattern (ZigZag correction). As with the motive-wave patterns we also have downtrend and uptrend corrective wave patterns, which have similar features in opposite directions.
in a wider uptrend-corrective wave pattern. The first wave or Wave A is characterized by a slight decrease in the value as investors save their gains and begin taking their money out of the market. Because the trend is still upwards, some traders will be able to enter the market and start the second wave, which is known as Wave B. As the first wave’s decline becomes apparent to buyers most of them will choose to pull out of the positions that resulted in the start of Wave C. At this moment, a lot of short-sellers will be drawn to help push the market down.
In a larger downtrend correctional wave pattern. The first wave is composed of participants who start to take their gains and also end their short-term trade positions. Downtrend draws a small number of sellers to come into the market towards the time of beginning the 2nd wave as well as Wave B initiating a weak rise. When Third Wave (Wave C) begins, those who are observing an increase in movement in Wave A will swiftly leave the market, causing other buyers to join the movement to push prices up.
How do you utilize Elliott Wave in trading?
We’ve explained the behavior of waves in the earlier paragraph by using Elliott Wave theory and observed how market participants go through various phases of waves. How do you interpret these waves and what is the best way to determine the appropriate time to trade or leave the market? The principle behind Elliott Wave trading strategy is to know the psychology of the market and be able to recognize the pessimistic and optimistic shifts. That is it is important to understand when the market is becoming positive and when they’ll be bearish. When the market is bullish it includes investors who have an appetite to make more trades and buy. But the bullish mood is slowly fading away as sellers’ remorse starts to take hold and investors start to sell certain of their investments. This is the correction phase that the markets are in.
Before you begin following your EW theory in a real market, you must determine where you will begin to count the waves. It can be difficult to recognize the type of wave at any particular time. Therefore, we suggest that you look at the extreme both low and high. This means you’re noting the change that the market is making in the other direction. For instance, if, for example, you begin your count at the highest point, you are watching the trend to the downside and vice versa when you begin counting starting at the low. It’s an esoteric use of the concept that won’t be very beneficial for experienced traders. If you wish to understand the pattern of the market waves, it is best to begin by counting the waves on the monthly or weekly charts. The EW principles suggest that traders must count starting at the conclusion of the previous wave of impulse.