We have 2 types of waves: Impulsive and Corrective
I am using a standard Elliot Wave cycle to try and more clearly define the difference.
The impulsive wave in red, is individual, it is independent - it is the RALLY or the DECLINE in a price.
Once an impulse ends it is followed by a correction and then another impulse and then another correction of that impulse and then another correction etc.
When the above is happening and we have impulses followed by corrections, we consider the current move to be healthy, whether declining or rising.
This is the way the market works, impulses are always larger than corrections and corrections are always smaller that or equal to a percentage of its impulse... a percentage like... 25%, 38.2, 50, 61.2... are you getting my drift ?
The correction is merely a price level at which traders decide to cash in profits - Since however there is two sides to the market, long and short, scared and greedy, confused and experienced etc... not everyone will take profit at that level, so the correction of the price is limited to a certain point... defined points we know as 25%, 38.2, 50, 61.2 etc.
A price movement is considered a correction ONLY if it corrects to a certain amount of the price.
For example if you have a bearish impulsive wave with a high of 1.100 and a low of 1.1:
- It is ok to consider the new price movement a correction if it reaches only as far as 1.25 (25%) or 1.38 (38.2) or 1.50 (50%) or 1.61 (61.2) or even 1.75 (75%) BUT if the price closes below 75% and moves further up, this is no longer a correction because it has reached price levels which are nearly or equal to reaching 100% of the previous move... this is not a correction
Corrections are just that: "they correct", correcting in normal English does not envision absolutely emphasizing change, it means partially emphasizing and applying change, so a price movement which is which is corrected absolutely is not a correction of its impulse, but rather a whole new Impulse on its own.
It is possible to have 1 impulse wave then another impulse wave right after in such a case, but naturally the market moves firstly in an impulse and then in a movement that corrects that impulse to a Fibonacci level.
One more example:
Bearish Wave with H: 1.100 and L: 1.1
When the price corrects (upwards) it can reach:
25%: Then start an impulse
This is an early correction meaning in my understanding that nobody hardly thought they should have taken profit and there is confidence that the decline will resume and still has much life
38.2%: Then starts an impulse
This is the logical correction level that almost everybody asumes the price will bounce off it is closely watched by pros and newbees alike.
50%: Then starts an impulse
This is normaly a very strong level and it is inbetween 38.2 / 61.8
"Some People" don't draw a 50% leve, they just have 38.2 and 61.8 and they leave a gap inbetween, which they consider a level within which they will accept prices to be in a retracement area and would consider any price action there retracement relative.
This is useful as it is common for people to draw their Fibonacci levels from different points, consecutively ending up with varying retracement levels.
When you have a gap between 38.2 and 61.8 it gives you the opportunity to amass all probable retracement level differencials created by varying drawing techniques and to bring them within one stable retracement area.
68.1%: Then starts an impulse
This is also a common retracement level. If the price fails at 38.2% people look for 68.1%
If a price breaks decisively out of 68.1%, you should start considering possibilities for this correction to actualy be an impulse and perhaps a new decline / rise... why ?
Because a rally is defined by: Higher Highs and Lower Lows, where as a Decline by Lower Lows and Lower Highs.
If a rally doesnt make a higher high, but stops rather somewhere inbetween its last correction and starts to decline AND ACTUALY makes a low below its correction or last higher low, you should wonder weather this rally is terminating.
Once again i stress.
RALLY = HH and HL
DECLINE = LH and LL
75%: Then starts an impulse
At this point in time you should have taken the necessary measures to prepare yourself for a good exit or taking a loss.
Price movement around this level is dangerous and you should be as weary as a virgin chicken in a rooster-house
If we have a close below this level we have a whole candle close (including wicks) below this level we are obliged to terminate our position.
Some would even terminate after a whole candle close below 61.8%
So... if a price corrects to 38.2 or 61.8 or in the gap between them and then moves up to 25% and closes a bove that with a good signal, it is ok to buy.
Vice Versa if a price corrects to 38.2 or 61.8 and keeps on moving down and closes below 75% it is ok to short.
These are simple guides synthesized from basic Elliot Wave and Fibonnacci principles, there is no magic.
Keep in mind that no matter how reliable a system is, you need to be weary of R and S levels.
I hope this somewhat helps Ahefner33
PS: If you feel this post has helped you out with your trading or given you insight to a better trading attitude please reward it with a few modest Reputation Points.
More Rep Points = Happy Effi = More Posts = Bigger Brain... kapish ?
GBP/USD DAILY REPORT
Cable strengthens mildly today but upside is still limited by 1.9777 resistance so far. As discussed before, the deep retreat from 1.9777 with mild bearish divergence condition in 4 hours MACD and RSI suggest a short term top is formed at 1.9777 and further consolidation is in favor to follow. As long as cable stays below 1.9777 resistance, risk remains for another pull back towards 1.9587 cluster resistance (38.2% retracement of 1.9261 to 1.9777 at 1.9580. However, we'd expect downside to be contained above 1.9452 cluster support (61.8% retracement of 1.9261 to 1.9777 at 1.9458) and bring rally resumption.
On the upside, above 1.9777 again will indicate rally from 1.9261 has already resumed for next upside target of 1.9846 high and then 138.2% projection of 1.8090 to 1.9142 from 1.8517 at 1.9917.
In the bigger picture, correction from 1.9846 has completed after three waves down to 1.9261. Break of 1.9846 high will confirm that rally from 1.8517 has resumed. However, close attention will be paid to sign of loss of upside momentum and reversal pattern formation as cable approaches key cluster resistance of 2.0106 (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067).
On the downside, it will take a break below 1.9452 support to indicate argue that the whole rise from 1.9261 has completed and shift short term focus back to the downside.