- Retracement may equal, but never pass the origin of Wave 1.
- Wave 2 is a corrective wave. It is always a 3 wave structure
marked A,B,C in the lesser degree.
Internal waves are (A5-B3-C5) or (A3-B3-C5)
- Wave 2 normally takes the form
of a Zigzag.
It can also develop into a
- At times, internal wave B may be a
Unlike wave 4, however, wave 2 cannot consist
entirely of a triangle, a triangle
in wave 2 must be restricted to an
internal wave, such as
B wave, or in a
complex correction X
wave. Triangles always
precede the final wave in a
sequence. (4 precedes 5, B precedes
C, X precedes Y) A
triangle contained within wave 2
will always resolve in the direction of the correction, not the trend.
- Wave 2 can become a
correction, but does so far less
frequently than wave 4.
- Before entertaining
the idea that Wave 2 has
correction you should
first consider whether
Wave 2 has already ended
and you are instead
watching the development
2nd wave 1-2 structure.
Confirmation always requires
movement beyond prior pivots.
Failed New High/Low Confirming Wave 2
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
The "Oh-Crap" Signal Confirming Wave 2
- Wave 1 ends after 5 waves and is followed by
a wave 2 retracement. Since wave 2 is most commonly a zigzag, and one of the common traits
of a zigzag is a steep and fast A wave, your first signal that wave 2 has started is
often the "oh,
crap signal," when the price reverses hard in a matter of a few bars or opens down significantly.
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
Using Wave 2 confirmation to enter a trade
Entering a trade for wave 2 is risky business
for a number of reasons.
- You might have missed an extension in Wave 1 and it isn't really finished.
- You are trading against the trend, which in itself is ill-advised.
- 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.
- 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.
- 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
- As a Zigzag (A5-B3-A5) -
.5 to .618 of Wave 1 - Generally around W1.1
- As a Flat (A3-B3-C5)- .382 of Wave 1 - Generally around W1.4
- As an Expanded Flat (A3-B3-C5)-
.236 of Wave 1.
- Statistically, 73% of Wave 2's will retrace to at least .5 to .618 and 15% as far as 100% of W1.
I'm not sure where these statistics came from, but they seem appropriate in our experience as far as larger degree waves are concerned.
With respect to smaller internal waves, especially in parent waves 3 and 5, it is far more common to see a .382 to .50 retracement.
- It is very important to note that the depth of wave 2 is a preview of the buying or selling
pressure of the market. A shallow Wave 2 retracement predicts stronger wave
3s. When Wave 2 is an expanded flat, you can pretty well count on
W3 to achieve a 2.618 multiple of W1. Expect big moves after flats.
Using Indicators with Wave 2
- As we mentioned with the end of
wave 1, indicators will typically be
showing a divergence beginning at
wave 4. Wave 5 moves on but
the divergence continues in wave 5. This
explanation applies to
wave 2 and all other waves as well.
The wave 5 of C wave in a wave 2
correction frequently shows