Wave 5

Wave 5 is certainly one of the most important waves to identify its completion. For trading, I particularly want to be able to identify: 1. the end of Wave 2 (beginning of Wave 3), 2. the end of Wave 4 (beginning of Wave 5), and 3. the end of Wave 5 (beginning of a correction of typically from 50-62% of the entire impulsive move).

Pattern: Wave 5′s are typically 5 wave patterns. The most common 5 wave pattern you will see in a W5 is an impulsive pattern. Sometimes, when the market has gone too far, too fast, you will see an ending diagonal. Either way, you don’t want to trade the end of a Wave 5 until a five wave pattern is complete. In order to see the structure of waves, you will need to look at the market at a small enough time frame to appreciate the pattern. Because of the fractal nature of waves, you will have to go all the way to a 1 – 3 minute chart to project a completed impulsive move. For example, Wave 5 on a daily chart will be made up of 5 waves. This 5 wave pattern may be seen clearly on a 30 minute chart. Then, because of the fractal nature of waves, you will see that the 30 minute chart’s Wave 5 is also made up of 5 waves. To appreciate the structure of the waves within waves, you will need to zoom all the way into a 1 minute chart to call the completed structure. You may find yourself in W5 of W5 of W5 of W5 looking at little wiggles on a 1 minute chart. The good thing about that is that your capital exposure can be extremely small (1 or 2 pts.) when placing a reversal trade.

Guidelines: If the PTI (profit-taking-index on the GET software) is less than 35, the probability of a successful W5 that takes out the W3 extreme is not good. A W5 failure will often be seen, or W5 may not even begin. Generally, that means that there has been “too much” profit taking. If you don’t have the GET software, a rule-of-thumb is that if the retracement of W1-3 is greater than 50%, you should not expect a “successful” W5. Also, if W3 is an extended wave, you should not expect W5 to be extended. On the other hand, if W3 is not extended, you can expect W5 to be an extended wave. Generally, in an impulsive move, W3 or W5 will be extended. For ES, the extended wave is most often W3.

Fibonacci Relationships: UNDER CONSTRUCTION ;-)

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