Impulsive Waves with the Elliott Theory

 

Hello there, this is tradingpedia.com and this video shows what are impulsive waves and what to consider when trading impulsive waves. We already introduced the concept of the Elliott Waves Theory and what it stands for. Back in 1930s, Ralph Elliott developed a theory and according to it, the market moves in cycles, or waves, as the name suggests.

Impulsive and Corrective Waves Theory

The theory is based on impulsive and corrective waves. To count impulsive waves, one uses numbers, and to count corrective waves, one uses letters.

An impulsive wave has a five-wave structure: 1-2-3-4-5. Let’s try to label the structure with numbers. This is the first wave, the second wave, the third, the fourth, and the fifth.

Out of these five segments, three are impulsive: the 1st, the 3rd, and the 5th. One of the first things to consider when interpreting an impulsive wave is that the 3rd wave cannot be the shortest.

If you will have a third wave, for example, like this, and the 5th like this, this is not possible because the 3rd is the shortest. However, it cannot be the shortest when compared with other impulsive waves in the structure.

Any impulsive wave must have an extension. Therefore, look for the extended wave. The minimum distance for the market to extend is 161.8% when compared to the next longest wave.

All we have to do is to check the length of the 1st and 5th waves, calculate 161.8% of the longest one, by using a Fibonacci Retracement or Expansion tool, and then compare the third wave with it. If the 3rd wave exceeds the 161.8% level, you have an extension. If the 3rd wave does not exceed 161.8%, the entire pattern is not an impulsive wave.

For instance, this is a move that does not qualify as an impulsive wave. For instance, if you see such a market move and someone labels it as an impulsive wave, that is not possible. If you take a Fibo tool and measure the 1st wave and apply the 161.8% on the 3rd wave, there is no extension, and that is not possible in an impulsive wave.

An impulsive wave does not channel. This move here, at the bottom right, channels very well. That is a characteristic of corrective, not impulsive waves.

The 1st wave can also extend, forming a first wave extension and also 5th wave extensions exist. How does a first wave extension looks like?

Well, the 1st wave is more than 161.8% of the 3rd wave. Even in such a case, the 3rd cannot be the shortest when compared with the length of the 1st or the 5th. All the rules are respected. How do we check for the extension?

This time, we measure the 3rd wave, we take 161.8% out of it and project that outcome over the 1st wave. If the 1st wave is longer than 161.8% of the third wave, then you have the extended wave. If not, that is not an impulsive wave.

The last possibility is that the market forms a 5th wave extension when the 5th is the longest and the 3rd is not the shortest.

One more thing on impulsive waves – actually two things. Overlapping between the corrective waves is not possible. You should focus on the 2nd and 4th waves. If the price action on the 4th wave comes into the territory of the second wave, that means overlapping – not allowed in an impulsive wave.

Principle of Alternation

Another thing to consider is the principle of alternation. It states that corrective waves should differ at least in one of the following – price, structure, complexity, distance, and so on. So the 4th wave should differ from the 2nd wave. If the 4th wave was complex in structure, look for the 2nd wave to be simple, and the other way around.

I still want to show you a possible 5th wave extension. It looks like this – 1, 2, the third wave like this, the fourth wave is not overlapping, and then the 5th wave extends in such a way that the market will not channel.

Remember – no channeling is possible with impulsive waves.

Is possible for this move on the GBPUSD to be an impulsive wave? This can be the 1st wave, this the 2nd wave, here is the 3rd, the 4th here, and then the 5th wave here. Normally we should check the extended wave if we do have an extension. We take a Fibo tool, find the 161.8% level and project it on the 1st wave.

Is this more than 161.8%? I would say yes. Therefore, an impulsive wave applies here. There is no overlapping, and the 2nd and 4th waves alternate. The 2nd wave takes more time than the 4th wave, the 2nd wave is more complex than the 4th one, so the principle of alternation is also respected.

Conclusion

Last but not least, the market is not channeling, so an impulsive wave should not be ruled out. Thank you for being here and have a great day.
Bye bye.