The Patterns That Describe Trending Market Movement

Impulse waves, rules & practical labeling.

Overview

This chapter introduces the core engine of market movement — the impulse wave. These waves drive trends and happen when lots of people agree to buy or sell at the same time. Impulse waves are the building blocks of a strong trend. They follow clear rules and have a repeating shape that we can learn to spot.

The Foundation of Market Trends

Every trending market often moves in a five-step pattern: 1–2–3–4–5. Steps 1, 3 and 5 go with the main trend (these are the strong moves). Steps 2 and 4 are short pauses or pullbacks. After the five steps, the market usually makes a three-step correction (A–B–C).

Characteristics of Impulse Waves

Impulse waves show force and speed. They tell us the crowd is moving together. Each small part has meaning:

Internal Structure — The Fractal Nature

Inside each big wave you will often find the same small 5-and-3 shapes again. That means the market repeats the pattern at many sizes — a small 1–5 can be inside a bigger 1–5. This is called fractal structure. Use degree labels (like Primary, Minor) so your charts don't get messy.

Core Rules of Impulse Waves

There are three rules you must check. If any are broken, it is not a proper impulse:

• Rule 1 — Wave 2 cannot go back past where Wave 1 started.
• Rule 2 — Wave 3 cannot be the shortest of waves 1, 3, 5. Usually Wave 3 is the longest.
• Rule 3 — Wave 4 cannot overlap Wave 1 (it must stay above/below Wave 1 extreme), except when you have a diagonal.

Guidelines (Not Absolute Rules)

These are strong tendencies — they help you choose the best count, but they can be broken sometimes:

• Alternation: If Wave 2 is deep and complex, Wave 4 will probably be simple and shallow (and vice versa).
• Equality: Wave 5 often ends near the same size as Wave 1.
• Volume: Volume usually peaks in Wave 3 and fades by Wave 5 (watch for divergence).
• Time symmetry: Wave 1’s time sometimes mirrors Wave 5’s time.

Confirming Impulse Waves with Fibonacci Tools

Rules are the top test. After that we use Fibonacci tools to confirm and find good entries and targets. Below are simple steps for each important wave. Read them slowly — short lines and examples make it easier.

Quick idea — why Fibonacci?

Fibonacci numbers (like 23.6%, 38.2%, 50%, 61.8%, 161.8%) are common levels where price pauses or reverses. We don't treat them like magic — we use them as helpful guides combined with wave structure.

Wave 2 (finding the end of the first pullback)

• Draw a Fib retracement from the start of Wave 1 (point 0) to the top of Wave 1 (point 1).
• Common reaction zone for Wave 2: around 50% of that move. Many traders watch 38.2%–61.8% too.
• Helpful entry: some traders look for early entries near 23.6% if the structure confirms, but 38.2%–50% is a cleaner reaction zone.
• Important: Wave 2 must not go past the start of Wave 1. If it does, the count is invalid.

Wave 3 (the strong trend wave)

• To project where Wave 3 might end, use the Wave 3 extension tool: apply Fib from 0 → 1 and then “pin” the middle point at 2. Common targets: 1.414× to 1.618× Wave 1 (measured from the start).
• Wave 3 must show good internal structure (it should itself look like an impulse). If price does not reach extension targets, re-check the count.

Wave 4 (the shallow pause)

• Measure a retracement from point 2 → point 3 (or from 0 → 3 for extra checks).
• Wave 4 typically reverses between 23.6% and 38.2% of the 2→3 move. 23.6% is a commonly used "standard" entry zone.
• Wave 4 often moves sideways — it rarely digs deep (unless it is a complex correction).
• To be extra careful, draw a retracement from the Wave 2 low to the Wave 3 high — this can give a tighter zone for entries.

Wave 5 (final push & target)

• Use a Wave 5 extension tool: measure 0 → 3 then drag to point 4 to project Wave 5 completion. A commonly watched level is near 38.2% (of the 0→3 projection) or equality with Wave 1.
• Wave 5 often shows weaker momentum and possible bearish/bullish divergence on indicators (price may make a new high but the oscillator does not).

Key practical tips (simple)

• Always check the three rules first. Fibonacci confirms — it does not replace rules.
• Use Fib for entries and targets, but only when the wave structure is correct.
• Wave 3 needs to itself look like an impulse (5 sub-waves). If it does not, re-evaluate.

Using Boxes to Study Impulse Structure

Draw a box around Wave 1. Duplicate it for Waves 3 and 5. Compare price height (how much the price moves) and width (how long it takes). If boxes match or look balanced, the trend has good rhythm. If boxes look wildly different, be cautious — that can signal a weak or finished trend.

Internal Confirmation with Oscillators

Combine geometry with momentum. Use RSI, MACD, or similar tools:

• Wave 3: usually the strongest reading on your oscillator.
• Wave 5: often shows divergence (price makes a new high but oscillator does not). That is a warning sign.

Common Mistakes in Impulse Analysis

• Counting swings instead of real sub-waves — swings are not the same as waves.
• Ignoring internal subdivisions and overlap — always check internals.
• Labeling before waves finish — wait for completion or box confirmation.
• Switching timeframes mid-count — pick one degree then check context above and below.
• Forcing a count to fit your bias — the market doesn't care what you want.

🔬 Practical Exercise

Open a live chart (BTCUSD, S&P, EURUSD). Try these steps:

1. Find a clear 1–5 move. Mark 0, 1, 2, 3, 4, 5 on the chart.
2. Check the three rules — if any break, re-label.
3. Use Fib retracements: 0→1 to find Wave 2, 2→3 for Wave 4, and project Wave 3/5 extensions.
4. Draw boxes around impulses and compare their size and time.
5. Look at RSI or MACD — check for momentum on Wave 3 and divergence on Wave 5.

🔑 Chapter Summary

Impulse waves are the market's strong moves. Always check the three rules first. Use Fibonacci as a helpful confirmation tool for entries and targets — especially for Waves 2, 3, 4, and 5. Combine structure, Fib, boxes, and oscillators to make a clean, high-probability count.