Elliott Waves are patterns of movement in a stock price that traders use to predict its future movement. Elliott Waves have been in use for decades and work on the principle that stock prices move in a series of Impulse and Corrective waves. A typical stock price undergoes eight waves, five of which are impulse (directional) and three are corrective (counter-directional).
Understanding Motive Waves
Motive waves in the Elliott Wave theory are waves that move the price of a stock in a certain direction. The theory holds that these waves are then countered intermittently by corrective waves. Motive waves can further be divided into three parts namely Impulse, Leading Diagonal and Ending Diagonal. Each of these motive waves has distinct patterns and are governed by certain rules. We will examine each of these Motive Waves closely.
Impulse Motive Wave
Impulse waves are the most common motive waves and tend to be the easiest wave to discern. Impulse motive waves consist of five sub-waves. These sub waves also operate on the same pattern as the larger waves namely three motive waves and two correctional waves. The behavior of these sub waves is governed by three rules that are unbreakable. These rules are that the second corrective wave can never retrace more than 100% of the initial wave. The second rule is that the third wave cannot be the shortest of the directional waves and finally, the fourth wave must never reach the same price level as wave one. If one of these rules is broken, then one must conclude that what they are observing is not an impulse wave.
Leading Diagonal Wave
The leading diagonal wave is a little harder to discern when analyzing stock price trends. The leading diagonal wave is also characterized by the same sub-waves but an important difference here is that its sub-waves have the longest first wave. Like the rest of the motive waves, its 2 and 4th waves are always corrective.
Ending Diagonal Wave
An ending diagonal wave is typically labeled 5 in the 1-5 directional and corrective waves pattern. Ending diagonal waves also have a series of sub-waves and follow the same rules as the other motive waves. The ending diagonal wave, however, will always have a higher RSI (Relative Strength Index) reading when compared with wave 3.
Importance of Motive Waves
Motive waves form a critical component of the Elliott Wave Theory. These waves are used across the work by market analysts to predict stock price movement and to enable them to act accordingly. Motive waves are based on human psychology and come close to helping analysts put a timeline to a stock price change.
Motive Wave Extensions
Motive wave extensions are an increase to a wave’s usual boundaries. Wave extensions are typically caused by various unique factors and may push the price of a stock higher up or lower down.
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