In the previous lesson, we covered how an Impulse Wave is constructed. Let’s see how this looks on a real chart with an exercise in identifying a 5-Wave Impulse formation.The chart in front of you is the British Pound versus US Dollar, or GBPUSD, on the Daily timeframe.
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In the previous lesson, we covered how an Impulse Wave is constructed. Let’s see how this looks on a real chart with an exercise in identifying a 5-Wave Impulse formation.
The chart in front of you is the British Pound versus US Dollar, or GBPUSD, on the Daily timeframe.
Take a look at the chart. Can you see an Elliott Wave in this section of uptrend? Pause the video and switch to full-screen if it helps.
Here are the Points we would mark. Let’s look at our Wave Count through the lens of the 3 rules of Elliott Wave.
Rule 1: Wave 2 clearly ends above the start of Wave 1.
Rule 2: Wave 3 is not the shortest Motive Wave. In this example, both Wave 1 and Wave 5 are shorter than Wave 3.
Rule 3: Wave 4 does not overlap with Wave 2.
Let’s look at another example, of the Euro-U.S. Dollar on a daily chart, but this time in a downtrend. Can you label a Five-Wave count on this segment of a downtrend? Like before, pause the video if necessary and view it in full-screen for clarity.
Like our previous example, let’s look at the Wave Counts we have identified through the lens of the 3 rules of Elliott Wave.
Rule 1: Wave 2 clearly ends above the start of Wave 1.
Rule 2: Wave 3 is not shorter than Wave 1 and Wave 5
Rule 3: Wave 4 does not overlap with Wave 2.
Were you able to identify the Elliott Waves on our two charts? Like many other aspects of Technical Analysis, Elliott Wave analysis takes practice and there will be times when the picture is not clear. When you can’t see clear points on the chart, it’s often best to move onto a different chart to trade or to wait until a clearer picture emerges on the chart you are already trying to trade.
In the examples we have used, Wave 5 moves beyond the end of Wave 3. However, Elliott Wave allows for the possibility that Wave 5 does not move past the end of Wave 3. When this happens, it’s called “Truncation”. This does not happen often, but it is important to note that it is a possibility under Elliott Wave rules. because if you’re trading a Wave 5, truncation could result in your trade not hitting its target.
So far, we have focused on Impulse Waves. As you know from our first lesson, an Impulse Sequence is followed by a Corrective Sequence!
What do Corrective Waves look like? Are there different types?
Let’s find out in the next lesson!
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