Impulse wave are always the five wave patterns on a chart. It does not matter if it is a tick by tick pattern or a daily chart. If it has five waves, it is an impulse wave. That means the trend of the wave to the next larger degree is in the same direction as the impulse wave. If this degree is also displaying a five wave impulse pattern then the trend of the next larger degree is also in that direction. This pattern continues throughout all the degree waves of the markets.
One of the primary ways I use to figure out the trend of the markets and the stocks by counting and recognizing impulse waves on my charts. When using the Elliott Wave, it is only necessary to know the degree in which you trade and the next higher degree. By knowing the next higher degree and its direction or trend, you can then more confidently trade the smaller degree that you actually use to trade. You will know ahead of time that you have either a five wave pattern to the upside or a three wave corrective pattern to trade. This makes it much easier to time your entries and exits.
Even if you have all of your Elliott Wave counting correct, it is still difficult to pick exact tops and bottoms. That's why I say 'the money is in the middle'. I always try to participate in the middle of the waves and not try to wring out every last cent from the tops. Too often, it will reverse and start a corrective wave before I can exit, so I am happy just making a profit. If you also use this method you can trade with more confidence because this is the easiest and the safest way to trade. Even
then, I find that I sometimes will have wave count changes that cause positions to be sold at a loss.
With impulse waves there are some rules which will help you even more in your trading. The most important rule to understand is that a wave 3 will never be the smallest wave of a five wave formation. Wave 3's are usually the largest in price terms and the longest in time terms of the impulse waves. You can make a lot of money by just watching for and trading the wave 3 of a five wave impulse pattern. Always, always try to trade the wave 3 moves.
Another rule concerning impulse waves is that a wave 4 can never overlap a wave 1. If it does, you have the counting wrong and you are not looking at an impulse wave. Go back to your counting of the waves and look at them again. You have an error somewhere.
A guideline but not an absolute rule of impulse waves is that the corrective waves 2 and 4 will alternate. If the wave 2 of the ongoing impulse wave is a sharp ABC correction down with a
large point move then wave 4 will likely be more of a sideways and time consuming correction. Another way in which wave 2 and four will alternate is by the counting of the respective wave
2 or 4. What I mean is that if wave 2 is a very simple and straightforward ABC correction it is likely wave 4 will be a much more complex formation. If wave 2 is complex then expect more of a simple wave 4 to take place. Again, these are not rules but guidelines that more often than not will play
out.
Finally, the last guideline for impulse waves that I want to get across this week is the idea of an extension. Many, if not most impulse wave patterns will have what is called an extension in one of the impulse waves. This means that this particular wave will show distorted subdivisions. When you
count the subdivisions you will find they are larger than the other subdivision waves in price and usually in time. Many times when looking at your chart the entire impulse pattern will more likely resemble a 9 wave pattern than a 5 wave pattern.
Extensions are supposed to be more likely to occur in the wave 3 of an impulse pattern but it seems to me as we move higher and higher in the markets, I have noticed a shifting of the extensions to the 5th wave. In other words, the wave counts are extending to the upside more and more as we
continue up to the ultimate wave top of this bull market we are currently enjoying.
One day the piper will have to be paid for all of those stock and market gains that are being racked up month after month and year after year. That's OK from my point of view because with options, I can make money with puts as well as I can with calls. Usually, even more and faster as the corrections always seem to travel father and in a faster mode.