Wave 2 Characteristics



Wave 2 Structures Wave B Triangle

Confirmations for Wave 2

Confirmation always requires movement beyond prior pivots.

Failed New High/Low Confirming Wave 2 Has Started

A failed new high or low is more frequently the action confirming that wave 2 is working.  As shown in the diagram below, this confirmation is actually the development of the lesser degree 1-2 waves of the a wave of the correction and is confirmed as wave 3 develops and moves past the wave 1 pivot.

Failed New High/Low

The "Oh-Crap" Signal Confirming Wave 2 Has Started

Trading Wave 2

Trading Wave 2 typically takes one of two forms.  Either you are using confirmation of wave 2 to exit a trade you were in during wave 1, or your prediction of the depth of correction will be sufficiently profitable to make a trade. 

Depth of retracement is generally unpredictable other than to follow the general statistics.  NORMALLY, you can expect the wave 2 range to be the prior wave 4 low (wave 1.4) and the .618 level.

Using Wave 2 Confirmation to Exit a Trade

Using Wave 2 confirmation as an exit for a trade is common practice and can be part of a sound trading strategy.

Using Wave 2 confirmation to enter a trade

Entering a trade for wave 2 is risky business for a number of reasons.

  1. You might have missed an extension in Wave 1 and it isn't really finished.
  2. You are trading against the trend, which in itself is ill-advised.
  3. There is no reliable means to predict how deep the wave 2 retracement will move. Sure, it could be .618 of wave 1, but it could also be .382.
  4. When wave 2 is finished, Wave 3 can at time start off like gangbusters. You may not have sufficient time to exit and maintain any profit, or worse, your profit is quickly turned into a loss on a reversal gap the next day.
  5. There are a number of complexities that can form (like expanded flats, X waves, and triangles in the B wave) that will make you miserable watching the wave develop

All of this having been said, you can certainly increase your odds of success by trading larger degree waves that are expected to be deep and take several hours or days to complete, but even that is no guarantee.  So, a word to the wise: If you don't clearly understand the risk, don't try to trade in wave 2.

Predictions / Retracement for Wave 2

Using Indicators with Wave 2