Faces of Waves Illustrated [3] - Motive wave

(Previous article is here)

So far, we memorized the basic six patterns of the waves. We also learned the basic labeling rules. We observed that wave has fractal structures, and we learned how to count sub-waves in a wave. I also hinted that there are rules and guidelines in which wave patterns comes after which. From this article, we focus on the detailed observation of each wave pattern, and I will present practical trading ideas.

Anatomy of motive wave

First, let’s take a look at motive waves. A motive wave has a clear direction. For an upward (bullish) wave, it always starts from lower and end higher as in this picture.

motive

As I mentioned before, motive waves has 5 waves. For upward waves, Waves 1, 3, and 5 are upwards, and Waves 2 and 4 are downwards. For downward waves, 1, 3, and 5 are downwards, and 2 and 4 are upwards. (I will not explicitly explain downward counter parts from now. Just flip the picture 180 degree in your mind.) Not all 5 waves sequence are qualified as motive waves, and it has to follow these rules to be qualified as motive:

  • Wave 2′s end point must not go beyond Wave 1′s start point
  • Wave 3′s end point must go beyond the Wave 1′s end point
  • Wave 4′s end point must not go beyond Wave 2′s end point

In other words, there are always gap between start point of the motive wave and Label 2, between Labels 1 and 3, and between Labels 2 and 4. And the Labels 2, 3, and 4 must be higher than its counter part. (see the chart indicated as “critical gap”.

Trading ideas in motive wave:

Because of the directionality of motive waves, it is easier to determine whether you want to buy or sell, and the trading success rate will simply go up if you trade on this wave. In fact, I never trade in corrective wave unless I find a motive wave within the corrective wave (Remember the fractal structures?). My trading plan is always focused around the motive wave. It’s a very important point to become a profitable trader using Elliott wave principle!

To present a concrete trading idea, I need to go into the details of two motive wave patterns: impulse and diagonal, so the readers have to be patient for now. But here is one thing worth remembering:

Now imagine you draw two straight lines for a motive wave. The first line passes Labels 1 and 3. The second line passes Labels 2 and 4. Those are called trend lines, and once defined they act as resistance and support. It requires more buyers for the price to go above the resistance line, and it requires more sellers for the price to go below the support line. So, the buying or selling energy are often not higher enough, and we see the price is bouncing against the narrow corridors defined by those two trend lines. So here come the ideas:

  • If you want to buy at dips, look for support line.
  • If you want to sell at rally, look for the resistance line.
  • If you want to set a loss cut line on your existing long position, look for a clear break of the support
  • If you want to set a loss cut line on your existing short position, look for a clear break of the resistance

Just one note for downward trend. No matter whether you are looking at upward or downward motive wave, a resistance line is always the trend line above the price level, and opposite for a support line.

In the next article, we will look at the first kind of motive wave: impulse wave.

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