While it is possible to trade all of the patterns in Elliott Wave, the Impulse waves are your money maker! Impulse waves are the most recognizable as it is easy to see price action move in a single direction compared to other more corrective structures.
Impulse waves are divided into five waves: Waves 1, 3, 5 are strong waves in the primary trend direction and they can be further divided into smaller 5 wave fractals. Waves 2 and 4 are corrective (we will cover corrections in separate articles).
There is a lot of psychology in why the impulse wave moves the way it does, most notably during wave three when the Fear Of Missing Out (FOMO) sets in with many buyers and they quickly jump on board to push the price further and faster than in the other waves. With that said, every impulse wave is unique, especially when comparing across markets or even assets.
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To help you understand how to navigate impulse waves, we have put together a set of rules and guidelines. The rules are Elliott Wave rules that cannot be broken if it is an impulse wave, whereas the guidelines are there to help you apply them in the crypto markets.
An impulse always subdivides into five waves
Wave 1 always subdivides into an impulse or (rarely) a diagonal
Wave 3 always subdivides into an impulse
Wave 5 always subdivides into an impulse or a diagonal
Wave 2 always subdivides into a zigzag, flat or combination (These are types of corrections)
Wave 4 always subdivides into a zigzag, flat, triangle or combination (these are types of corrections)
Wave 2 never moves beyond the start of wave 1
Wave 3 always moves beyond the end of wave 1
Wave 3 is never the shortest wave
Wave 4 never retraces beyond the end of wave 1
Never are waves 1,3, and 5 all over-extended.
Wave 4 will almost always be a different corrective pattern than wave 2
Wave 2 is usually a zigzag, or zigzag combination
Wave 4 is usually a flat, triangle or flat combination
Sometimes wave 5 does not move beyond the end of wave 3 (in which case it is called a truncation or failure)
Wave 5 often ends when meeting or slightly exceeding a line drawn from the end of wave 3 that is parallel to the line connecting the ends of waves 2 and 4, on either arithmetic or semi log scale
The center of wave 3 almost always has the steepest slope of any equal period within the parent impulse except that sometimes an early portion of wave 1 will be steeper
Wave 1,3 or 5 is usually extended
Often, the extended sub wave is the same number (1,3 or 5) as the parent wave
Rarely do two sub waves extend, although it is typical for waves 3 and 5 both to extend when they are of Cycle or Super cycle degree and within a fifth wave of one degree higher
Wave 1 is the least commonly extended wave
When wave 3 is extended, waves 1 and 5 tend to have gains related by equality or the Fibonacci Ratio
When wave 5 is extended, it is often in Fibonacci proportion to the net travel of waves 1 through 3
When wave 1 is extended, it is often in Fibonacci proportion to the net travel of waves 3 through 5
Wave 4 typically ends when it is within the price range of sub wave four of 3. 15. Wave 4 often subdivides the entire impulse into Fibonacci proportion in time and/or price.
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