Corrective Wave

Not every leg on a chart is doing the same job. Some moves are the trend actually going somewhere, and others are just the market working off the last move before it can continue, and learning to tell the two apart on sight is most of what’s needed before wave counting starts to make sense. What an impulse wave looks like An impulse wave is the trend doing its real work, price covering ground quickly and directly, with candles that mostly close in the same direction and don’t overlap each other’s ranges very much. It’s the kind of move that leaves large fair value gaps behind, because it’s outrunning the two-sided trade that would otherwise fill in every level along the way. If you had to describe it in one word, it would be committed. ...

Ralph Nelson Elliott, an accountant rather than a trader by background, spent the 1930s studying decades of stock market data and concluded that price doesn’t move randomly, it moves in a repeating rhythm of five waves one way followed by three waves back, over and over, at every size from a few hours to several decades. That rhythm is what Elliott Wave theory tries to count, and it’s built directly on the impulse and corrective distinction from the previous article. ...