Knowledge Base
How to nail the top of the wave ( iii ) up
In any Five Wave fractal wave 3 is the strongest part of the move. This is when price starts acceleration of the move up in the Five Wave up fractal or move down in the Five Wave down fractal. What makes the price to accelerate is that more and more traders get convinced that the move has room to go higher and they make decision to join the move by betting their own money.
Test 1. Wave ( iii ) has to have a clean ( a )-( b )-( c ) structure
The general advice for beginners is to never attempt fighting wave 3. It just keeps moving in direction of the trend. And the higher it gets the more shallow pullbacks it generates! For many traders it becomes a challenge. They call the market “overbought” and short it. And then they keep watching how it keeps climbing even higher. The fact that price climbs in a slow seemingly indecisive way convince many traders that bulls got tired. That strengthens their conviction about coming reversal in the market. They add to the short position opened at lower levels. And then some counter-intuitive thing happens. After days or even weeks of slow grinding move higher when it felt like the trend may get broken any minute price starts to accelerate its move higher! This is when bears give up and start covering shorts trying to recover at least small part of the capital invested in building short position. And this move higher powered by short covering becomes the very last grasp of the move in subwave ( c ) of wave ( iii ) up! Trading wave ( iii ) may involve a lot of emotions and a lot of failed calls for the market having topped. Is that really possible to nail that top of the strongest part of the rally in subwave ( c ) of wave ( iii ) up? Yes, it is! That is a complex task that requires you to be fully focused on details. In this lesson I will explain you what you should check before you can confidently say that wave ( iii ) has completed.
First what you should always remember is that wave ( iii ) has to has a clean subdivision into three subwaves ( a ), ( b ) and ( c ). Second, subwave ( b ) should never violate a starting point of subwave ( a ). The third test is to check whether wave ( iii ) has stretched at least to 176.4% extension of wave ( i ) up projected from the bottom of wave ( ii ) down. If it has not stretched to that extension you should not call it wave ( iii ) of the Five Wave fractal.
Test 3. Wave ( iii ) has to stretch at least to 176.4% extension of wave ( i )
The test number four is to check if subwave ( c ) of wave ( iii ) is longer than subwave ( a ). In the vast majority of cases the bare minimum size of subwave ( c ) of wave ( iii ) is 123.6% of subwave ( a ) of wave ( iii ). If you think that subwave ( c ) of ( iii ) is ready to top but it has stretched to only 100% extension of subwave ( a ) of wave ( iii ) chances are you are going to make a bad call. Most likely you are dealing with a minor top of a micro wave iii inside subwave ( c ) of wave ( iii ) up.
Test 4. Subwave ( c ) of wave ( iii ) has to be longer than subwave ( a )
On the next step time comes to get your hands dirty. That means that you should focus on the micro structure of the strongest subwave ( c ) of wave ( iii ). Your goal is to make sure it has a complete Five Wave micro structure.
That means it has to meet the following criteria:
1. The low of corrective wave ii down can not violate a starting point of wave i up.
2. The low of corrective subwave b down of wave iii up can not violate the low made by corrective wave ii down.
3. Wave iii up has stretched at least to 176.4% extension of wave i up.
4. Subwave c of wave iii is longer than subwave a of wave iii.
5. You can clearly recognize a corrective wave iv down that follows a strong move in wave iii up. Wave iv has to retrace at least 23.6% of preceding move in wave iii.
6. After completion of a countertrend move in wave iv there should be wave v making a new higher high over the top made by wave iii up.
3. Wave iii
You can not confidently call the top of subwave ( c ) of wave ( iii ) without focusing on a micro structure of that impulsive wave. There is only one way to make a confident call about completion of subwave ( c ) of wave ( iii ) and that is to get confirmation from violation of the Final Support. Let me explain you what the Final Support means. The Under the Five Wave up fractal every successive corrective wave has to make a higher low in comparison to the low made by preceding corrective wave. After completion of each new corrective wave you can move a critical support for the unfolding Five Wave up fractal higher (please see the chart below). When subwave a of wave v goes over the previous top made by either wave iii or subwave a of wave v it is the last time when you move the critical support higher. The low of subwave b down of wave v up becomes your Final Stop. That means that if the next countertrend move violates that low that would essentially mean that the Five Wave up fractal has completed. If that micro Five Wave up fractal has completed that subwave ( c ) of wave ( iii ) has completed and a corrective wave ( iv ) down has started!
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