Impulse and Correction Waves
By: Ashley
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In Elliott Wave Theory Basics, we showed you the basic Elliot Wave pattern and described the various waves. Now lets dig deeper and explain the Impulse and Correction waves in more detail. This lesson will explain the Impulse and Correction waves of Elliot Wave Theory.
Waves one, three and five are the impulse waves, or minor up-waves. Waves two and four are the corrective waves, or minor down-waves in the major bull move. The waves lettered a and c are the minor down-waves in a major bear move, while b is the one up-wave in a minor bear wave. Sounds simple enough, right? Lets start using a real world example:
The Elliott Wave isn't always pretty and perfect as we see above, but the theory is intact. This long term wave is actually graphed over a period of almost three years. There are a few variations from the perfect wave, but that is quite normal. Elliott proposed that the waves exist at many levels, meaning there could be waves within waves. An important feature of Elliott Wave Theory is that they are fractal in nature. Fractal means market structure is built from similar patterns on larger or smaller scales. Therefore, we can count the wave on long-term yearly market charts as well as short-term hourly market charts. The graph below shows how primary waves could be broken down into smaller waves. It shows the graph above from the beginning through point 1 toward point 2:
The major waves determine the major trend of the market, and minor waves determine minor trends. Elliott provided many variations on the main wave, and placed particular importance on the golden mean, 0.618, as a significant percentage for retracement.
Trading using Elliott Wave patterns is quite simple, on the surface. Identify the main wave or Supercycle, enter long, and then sell or short, as the reversal is determined. This continues in progressively shorter cycles until the cycle completes and the main wave resurfaces. However, care must be taken since much of the wave identification is taken in hindsight and determining which cycle the market is in is not always obvious.
An impulse-wave formation followed by a corrective wave, form an Elliott wave degree, consisting of trends and countertrends. Although the patterns pictured above are bullish, the same applies for bear markets, where the main trend is down.
In our next lesson, we will discuss the assumptions of Elliott Wave Theory and the different Cycles of waves.
