Tag: 5-wave impulsive pattern

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Forex Course

109. Fractals – Elliot Waves within an Elliot Wave

Introduction

Introduction

Introduction

The 5-3 wave pattern is made up of the combination of 5-wave impulsive pattern and a 3-wave corrective pattern. The 5-wave pattern is inclined towards the predominant trend, while the 3-wave pattern is always against the trend. It is basically a pullback to the overall trend.

However, it does not end there. Within each wave in the impulsive and corrective waves, there is a set of other impulsive and corrective waves. And in that each smaller set of impulsive and corrective waves, there exists another miniature set of impulsive and corrective waves. This top-down approach goes on and on, forever.

The Top-down Approach

The Top-down approach can be considered as a synonym for fractals. In the Elliot wave theory, each wave is made of sub-waves and so on. In an uptrend, the 5-wave impulsive pattern faces upside. In these five waves, waves 1, 3, and 5 are towards the overall trend, while waves 2 and 4 against the trend.

In the same uptrend, the corrective wave pattern faces against the trend, where waves A and C face against the trend (downwards), and wave B faces towards the trend (upwards). In this sequence, there are five waves towards the overall trend (with two minor pullbacks) and three against the trend (with one minor pullback).

According to the fractal theory, each push up and push down has the above sequence. For instance, if we extract wave 1 and wave 2, then wave 1 will be made up of a 5-wave impulsive pattern, and wave 2 will be made up of a 3-wave corrective pattern. In conclusion, the combination of two waves (1 and 2) results in a set of 5-3 wave pattern. Refer to the below figure to get a clear understanding.

The Ordering and Labelling of Elliot Waves

We know that every wave can be broken into smaller waves and so on. But referring to these waves becomes the challenging part. So, to make simplify the labeling of these waves, Elliot has assigned a series of categories to the waves in terms of its size (from largest to the smallest).

Conclusion

We saw that every Elliot wave is made up of another miniature Elliot wave, and this break-down goes forever. But, according to Elliot, the degree identification is not a necessary factor in Elliot wave analysis. As a trader, our goal is not to assign the right degree to the wave pattern but to just understand the timeframe in which it is occurring. In the end, all that matters is the basic analysis of the wave theory. The identification of degree always remains secondary. Cheers.

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Forex Course

107. Comprehending The Impulsive Waves In Elliot Wave Theory

Introduction

Introduction

Introduction

In the previous lesson, we got started with understanding the fundamentals of the Elliot Wave theory. An introduction to impulsive waves and corrective waves was also discussed. This lesson shall go over the concept of impulsive waves.

There are two types of waves in the Elliot theory, impulsive and corrective. And as a whole, Elliot stated that a trending markets move in 5-3 wave patterns. The 5-wave pattern corresponds to the impulsive wave, and a 3-wave pattern corresponds to the corrective wave. And the combination of the 5-wave and 3-wave patterns form a trend.

Formation of Impulsive Wave

The impulsive waves are formed by five waves numbered from 1 through 5. Wave numbers 1, 3, and 5 are motive, i.e., they are the waves that go along the overall trend, while wave numbers 2 and 4 are corrective waves that go against the overall trend. Below is a diagram that represents the 5-wave impulsive pattern.

This is the impulsive wave that is formed in all types of instruments. It claimed that this wave patterns form not only in stocks but on currencies, bonds, gold, oil, etc. as well. Now, let’s interpret each wave in the impulsive wave pattern.

🌊 Wave 1 – This is the first up move in the market. This is typically caused by a handful number of people who think that the currency is at a discounted rate and is the right time to buy.

🌊 Wave 2 – This move is against the previous move. There is a dip in the market as the initial buyers are booking profits, thinking it is now overvalued. However, it does not go down until the previous lows because it is also considered to be at a discount for other traders.

🌊 Wave 3 – Wave 3 resembles the wave 1. This wave is usually the longest and the strongest in terms of momentum. This is because, as the price goes higher and higher, the mass public begins to buy along with the institutional players. Hence, it is stronger than wave 1.

🌊 Wave 4 – After a strong up move (wave 3), some traders start to book profit, assuming the security has become expensive. However, this down-move is not quite strong because there are traders who still believe in the bullishness and hence see this as a discounted price.

🌊 Wave 5 – Wave 5 is when most people start to buy security. This is solely due to panic and is considered to a rat trap. Wave 5 is when the security has reached the news. All traders and investors on the news channels advice the public to buy.

But, in reality, this is when the security is considered to be overpriced. The big investors and institutions begin to short and square off their positions. And the liquidity for it is provided by the mass public.

All these waves together form the 5-wave impulsive pattern. We hope you were able to comprehend this concept of impulsive waves. If not, shoot your questions in the comment section below, and don’t forget to take the below quiz.

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