If you want to trade the Elliott Wave theory, then you should learn the concept of corrective and impulsive waves which, because of its simplicity, can be very beneficial in your trading efforts. These two wave types create the market structure and, if you are able to tell the difference between the two, it allows you to see high probability and low probability trades.
The impulsive wave is what allows the trends to exist. It exists as a sustained move in a single direction with the majority of the price bars also moving in the same direction.
The correction is the smaller move. This takes place in the opposite direction of the aforementioned impulse.
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An impulse highlights the direction of existing momentum. The impulses are responsible for creating trends, which means you want to enter on a corrective wave and the ride an impulsive wave. Every trend is made up of several impulse waves and just a few corrections.
The prices move in a structured manner. In some cases, when the structure is unclear, it helps to make the switch to a longer period of time. This allows you to see if the currency pair is within a larger, more complex correction pattern, which is the reason the structure isn’t very clear in the time frame you were looking at. You should trade in the same direction as the impulses until there is an obvious reason not to.
Some of the reasons you should avoid trading in the direction of the seen impulses include:
- If the impulses are becoming smaller, which indicates a reduced momentum and the possibility of reversal.
- If an impulse in the opposite direction takes place, which means you should begin looking for trades that are in the direction of the new impulse.
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This doesn’t always mean you are trading at all times. You don’t want to trade every time a price swing occurs. If the price structure isn’t clear, then don’t make a move until it is. The wave structure takes place on each time frame, which means impulse waves that are higher on a chart over a minute may be a corrective wave against a downtrend on a 10 or 15 minute chart.
Don’t let this scare you away from making a trade on your time frame, but try to keep some perspective on where you plant to take trades, related to the trends and the corrections that are seen in other periods of time.
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