4. Impulse Wave
An impulse wave is a wave that signify the main direction of the current trend. It consists of 5 waves: 3 in the direction of the larger wave, 2 in the counter direction. Personally, I believe this formation is the backbone of Elliott wave analysis since it is the easiest to spot and when it is spotted, there is only limited number of possibilities of what would happen in the future.
A traditional graphic representation of an impulse wave is as follow:
The three gospel rules of Elliott wave formation have to be satisfied:
- Wave 3 is never the shortest wave.
- Wave 4 never breaks wave 1 high/low.
- Wave 2 never retraces 100% of wave 1.
Other than the basic rules, there are four important concepts in impulse wave formation and I’m going to go through them one by one in more details below:
1. Rule of Alternation
This guideline states that wave 2 and 4 of an impulse wave always have distinctive feature(s) either in price retracement or shape/structure. I will discuss corrective wave structures in the next series so just consider there are different corrective wave formations for now. The figure below is one example of rule of alternation:
In this example, wave 2 and 4 are different by their shapes: wave 2 is a zigzag and wave 4 is a sideway triangle. This is a guideline, however, when the rule is not adhered to (i.e. the two corrective waves appear similar to one another), it is highly suspect that the five wave structure could be a corrective wave.
2. Rule of Wave Extension
Most likely than not, there is one extended wave (usually much longer than the rest) in every impulse wave, however, wave 3 is never to be the shortest one even if wave 1 or 5 extends. An extended wave will subdivide further to another impulse wave and its length will be longer by usually a fibonacci ratio (1.618, 1.382) to the next longest wave. The following figure shows an extended wave 3 (the more common one):
This guideline is useful for forecasting because the other two non-extended waves would usually be about the same length (wave 3 will always be the longer one of the two when it is not extended).
3. Terminal Impulse Wave
Terminal impulse wave formation occurs as a subdivision of a wave 5 or wave C of a corrective wave. Only in this formation a motive wave is divided into 3 – 3 – 3 – 3 – 3 instead of 5 – 3 – 5 – 3 – 5 (usual subdivision). Another common name for this formation is an ending diagonal triangle.
This formation signifies an end of a trend and it is commonly followed by a swift retracement.
4. Failed/Truncated Impulse Wave
There are times when the crowd sentiment becomes extreme and the trend seems to be out of breath. When this occurs, wave 5 of the impulse wave can ‘fail’ or not exceed wave 3 high/low. This commonly occurs after a strong wave 3.
Note that the subdivision of a failed wave 5 is still a 5-wave structure.
Knowing and practicing these concepts in real life will help you identify where the stock market is at. An impulse wave can be:
- A part of a larger impulse wave in the direction of the trend
- The beginning or the end of a zigzag (5 – 3 – 5) corrective wave.
- The end of a flat (3 – 3 – 5) corrective wave.
Finding a completed impulse wave is usually the first thing I do to recognize a new pattern. Once I find one, I can trace the one before or after to determine where the larger trend is. The good thing is that impulse wave is usually very clear as well, unlike its counterpart, so spotting it should not be difficult.
If I think or find of something else factual about impulse wave, I will add it here. For now, I hope this is a good introduction for anybody who’s interested in Elliott wave.
RH
