Impulsive Waves is one way of describing an asset price’s strong move to conincide with the primary direction of the underlying trend. Impulsive waves is also a term used to refer to the strong downward move that occurs in a downtrend. This type of wave enables a trend to exist, withy its sustained movement in one direction and the majority of the price bars moving in that same direction. Impulsive Waves are not limited to a specific period of time but can last for hours, years or even longer. However whatever the timeframe, Impulsive Waves will always run in the exact same direction as the main trend.
Where Do Impulsive Waves Form on a Technical Chart?
In Elliott Wave theory, there are two types of waves, Impulsive and Corrective, both of which appear on analytical charts. These terms are used to describe the ebbs and flows of market progression as they have a similar appearance to a wave in their flowing nature. Impulsive Waves occur in blocks of five waves and this is then usually followed by a set of three Corrective Waves in which the market would struggle to show any development or change. While Corrective Waves tend to be more of a range bound or a sideways move, Impulsive Waves can cover quite a lot of ground. Impulsive Waves can also occur in both a positive or a declining market. In the positive market, the Impulsive Waves will take the form of five waves going upwards and then three going down, whereas in the declining market, the opposite will be true i.e. the Impulsive Waves will be in the form of five waves going down and then three going up.
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Although it may seem difficult to trade impulsive waves, in fact it is not as complex as might be thought as long as you follow the basic rules.
- The second wave can never go below the beginning of the first wave.
- The third wave can never be the shortest
- The fourth wave can never enter the territory of the second wave
How to Trade Impulsive Waves
There are a few ways to trade Impulsive Waves.
The first way is to trade the second wave, which can never go below the beginning of the first wave. If there are five waves in Wave 1, this can be taken as a good indicator to take a short position. Usually, the second wave will retrace around 50% to 61.8% of the first wave and therefore this is a good level to Take Profit. You can set a Stop Loss for this trade just above Wave 1’s end point.
The second way is to trade Wave 3. Once the second wave approaches 61.8% of the first wave, traders can place a buy limit order. Usually, the third wave will be the longest and will therefore retrace around 161.8% of the first wave. You can therefore use a Fibonacci Extendion tool to measure the potentil target for the third wave and put a stop loss at the start of the first wave.
It is also possible to trade the 4th wave, and if there are 5 impulsive waves in wave 3, it is possible to enter a short position in the fourth wave. Frequently, the 4th wave will retrace around 38.2% of the third wave, so you can set a stop loss just above the end of the third wave.
The last way is to trade the 5th wave. As the 4th wave is approaching 38.2% of the third wave level, it is possible to enter a long-term position in the last 5th impulsive wave. Usually, the 5th wave will retrace round 61.8% of the third wave and therefore the stop loss should be placed at the end of the first wave as the fourth wave cannot enter the 2nd wave’s territory.
Other educational articles
- What are Corrective Waves in Binary Options Trading?
- Triangles as Continuation Patterns in Binary Options Trading
- Divergences In Binary Options Trading
- What are X Waves in Binary Options Trading?
- How to Recognise and Use the Head And Shoulders Pattern in Binary Options Trading
- Introduction to Japanese Candlestick Formations
- Aronson, David. Evidence-based technical analysis: applying the scientific method and statistical inference to trading signals. Vol. 274. John Wiley & Sons, 2011.
- Ni, He, and Hujun Yin. “Exchange rate prediction using hybrid neural networks and trading indicators.” Neurocomputing 72, no. 13 (2009): 2815-2823.