One of the most fundamental skills every Elliott wave analyst must develop is the ability to identify possible impulse waves. The first step in this process is learning the basics of their structure in a theoretical sense. In a nutshell, an impulse wave is a trending movement that can be in either direction, has 5 waves, and obeys certain rules and guidelines.
An impulse wave
Waves 1, 3, and 5 move in the direction of the impulse where each contain 5-wave patterns. Waves 2 and 4 are corrective movements moving in the opposite direction of the impulse. By “move” we mean the price direction the waves makes when connecting its start and end point on a plot with time in the x-axis and price in the y-axis. So for example the termination point of wave 1 (equivalent the start point of wave 2) to the termination of wave 2 must move down (wave 2 ends at a lower point than it started) if the impulse is upward.
In additional to these structural requirements, there are several rules that must be obeyed:
At no point during wave 2’s progress does it retrace more than 100% of wave 1. This means that in a downward moving impulse, the high of wave 1 can be exceeded by no part of wave 2.
Wave 3 cannot be shorter than both waves 1 and 5.
Wave 4 cannot terminate in the price territory of wave 1. Price territory simply means price range. So the chart below depicts a valid impulse wave even though wave 4 crosses into wave 2 territory.
A valid impulse wave showing subdivision in corrective waves where wave 4 terminates in wave 2 territory.
Wave 3 of an impulse wave is always an impulse wave itself. Wave 1 is either a leading diagonal or impulse wave and wave 5 is either an ending diagonal or impulse wave. It would be incredibly unusual, and perhaps impossible, for an impulse to have a leading diagonal for wave 1 and an ending diagonal for wave 5.
The impulse wave is a key component in any Elliott wave structure. While not a sufficient condition to be a good analyst, understanding the rules behind its structure is necessary for any Elliott wave analyst or any follower of Elliott wave analysis.