Elliott Waves Theory – Defining Impulsive Waves
An impulsive wave is a five-waves structure labeled with numbers (1-2-3-4-5) and it is the move every trader wants to catch. The reason for this is the fact that in an impulsive wave price is supposed to move faster than in a corrective wave.
In this Forex Trading Academy section dedicated to the Elliott Waves Theory, you’ll find out that that is a wrong approach to understanding impulsive waves. Not only that impulsive waves are complex structures, but, at least when it comes to the Forex market, they are not that common.
Yes, this market that trades more than five trillion dollars on every business day, it is spending more time in consolidation areas or ranges, than travelling in impulsive waves. However, consolidation areas or corrective waves, are also having impulsive waves of a lower degree in their component.
For example, a complex correction like a triple zigzag pattern is having no more, no less than six impulsive waves of a lower degree in its componence. This makes it be one of the most vicious and powerful ways a market can move, and almost all Elliott traders, are assimilating it with an impulsive wave. This is totally wrong.
In order for a move to be interpreted as an impulsive wave, it needs to follow specific rules for each and every wave out of those five waves, as well as rules and conditions for the overall impulsive wave. Moreover, even price action to follow an impulsive wave needs to obey other rules that are basically confirming the previous impulsive wave. If the rules for the move to follow an impulsive wave are not respected, then the previous impulsive move is simply not correct.
What Makes an Impulsive Wave?
There are many things and conditions to look after before deciding if a move is an impulsive wave, or a five-waves structure. Only if that respective decline or advance in the market respects all impulsive rules, one can say for sure that the count is correct.
One thing that traders fail to realize is that counting waves with this trading theory are subject to interpreting future market moves based on previous patterns/conditions/price action in the past. Counting should not be done with current price levels, but current price levels should be a reaction of previous counts on the same time frame or bigger ones.
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Rules of an Impulsive Wave
The following are rules that define an impulsive wave, and any move that respects them is a valid Elliott Waves five-waves structure. They should be interpreted together as part of what makes an impulsive or a motive wave, and if only one is not respected, then the whole interpretation falls apart.
The 1st, 3rd, and 5th Waves Are Impulsive
In any five-waves structure, the 1st wave is an impulsive wave of its own. It means that all the rules of an impulsive wave that are valid for the overall structure should be respected by the first wave as well.
The only difference is that this 1st wave is of a lower degree or different cycle. For example, if the bigger degree impulsive wave is expected to form on the monthly chart, then the 1st wave will be forming a five-waves structure of a lower degree that is visible on the lower time-frames, like weekly and daily ones.
The same thing applies to the other motive waves in a five-waves structure, namely the 3rd and the 5th ones. Separately taken, they need to be impulsive waves on their own. Together, they are being part of an impulsive wave of a bigger degree.
3rd Wave Cannot be the Shortest out of the Three Impulsive Waves
This is by far the most important rule of them all in an impulsive wave and it totally validates or invalidates a count. Such a rule cannot be bent or ignored and it has the great advantage that it is visible in any five-waves structure.
What I’m trying to say here is that even before starting to label a possible impossible wave, if the potential 3rd wave is the shortest one when compared with the 1st and the 5th waves, then the whole pattern is not an impulsive one. Most likely it is falling under corrective waves category and more investigation needs to be done in order to come out with the proper count.
One Wave Needs to be Extended
Out of the three waves that need to be impulsive in a five-waves structure (the 1st, the 3rd and the 5th), at least one needs to be extended. Extension refers to the longest wave out of these three and it is in strong relation with Fibonacci levels.
Actually, the overall Elliott Waves theory would be meaningless if there were no Fibonacci levels involved. More on this on future articles.
As a rule of thumb, a wave is considered to be extended if it is bigger than 161.8% when compared with the other two waves. Such a wave is usually the 3rd wave, but 1st and 5th waves extended impulsive waves are also common.
The 2nd and the 4th Waves Are Corrective
In any 1-2-3-4-5 labeling, the 2nd and the 4th waves are considered to be corrective waves: the 2nd wave is the reaction to the 1st wave, and the 4th wave is the corresponding reaction to the 3rd wave. A very good question would be here: what is the market reaction to the 5th wave in an impulsive move?
The answer to that question comes from the reaction market has to the overall 1-2-3-4-5 impulsive wave, and it is a bigger degree than the reaction for the 1st and 2nd waves. Nevertheless, all are corrective waves.
Both 2nd and 4th waves correct into the territory of the 1st and the 3rd wave and the retracement level is different. The 2nd wave cannot retrace beyond the start of the 1st wave, and the 4th wave cannot retrace into the territory of the 2nd wave. Usually, the 2nd and the 4th waves are different in many aspects, starting with structure, distance traveled, complexity, etc.
By now already, Elliott Waves theory doesn’t look that simple anymore. So many things to consider only on an impulsive wave structure? Well, these are only basic things, as impulsive waves are of different types (no less than four types!!!) and this further subdivides the overall analytical thinking when labeling markets.
Other educational materials
- What is Elliott Waves Theory?
- Defining Corrective Waves
- Use the Fibonacci Extension Tool in Elliott Waves Theory
- Different Fibonacci Levels Important When Trading with Elliott
- Trading Different Types of Extended Waves
- Bill Williams – How to Use Williams Indicators When Trading Forex
Recommended further readings
- Fuzzy time-series based on Fibonacci sequence for stock price forecasting, TL Chen, CH Cheng, HJ Teoh, National Yunlin University of Science and Technology
- Applying Elliot Wave Theory Profitably, Steven W. Poser, John Wiley & Sons, 30.07.2003