2 / 4 · 6 min
The impulse: three rules and the price at which the count is dead
There are only three rules, and each gives a specific number. This is the one place in all of wave analysis where a claim can be refuted — and therefore the only place worth building a trade on.
An impulse is five waves in the direction of the main move: three with it (1, 3, 5) and two against (2, 4). Everything you will hear about proportions, extensions and the "personality" of each wave are guidelines. There are exactly three rules that cannot be broken, and those are what to hold on to.
The three rules
- Wave two does not pass the start of wave one. If it did, that was not wave one and the count is dead.
- Wave three is not the shortest of the three waves going with the move. It may not be the longest, but it is not the shortest.
- Wave four does not enter wave one's territory, that is, it does not overlap its end. There is one exception — the diagonal — covered below.
A whole impulse, in numbers
Wave one: from 1,480 to 1,720, a length of 240. Wave two: a pullback to 1,560 — the start of wave one at 1,480 was not touched, the rule holds. Wave three: to 2,140, a length of 580. Wave four: a pullback to 1,940 — the end of wave one at 1,720 was not overlapped, the rule holds. Wave five: to 2,260, a length of 320. Check the second rule: 240, 580, 320 — wave three is the longest, so it is certainly not the shortest. The count is legal under all three.
Where your trade is in all this
Each rule turns into a price, and that is the whole point. While you believe wave two is running, your count is dead below 1,480 — that is where the stop belongs, not "roughly under the pullback" but exactly at the invalidation price. While wave four is running, the count is dead below 1,720. Note the order: the invalidation price is known BEFORE the entry and does not depend on how you may feel like looking at the chart tomorrow. A count without such a price is a story, not a trade.
Rescuing a count with the word "diagonal"
Wave four entered wave one's territory — under the third rule the count is dead. And here the diagonal gets remembered: a special kind of impulse in which overlap is allowed. Sometimes that is true. But if the diagonal gets remembered EVERY time the rule is broken, you have not found an exception — you have abolished the rule. The honest order is this: you call it a diagonal only if you decided so BEFORE the breach, on its own signs, not afterwards to save the count.
Counting on the wrong scale
Five waves are visible on almost any stretch if you zoom in far enough. Inside every wave there are five more, and inside those, five more. Hence the typical beginner's trouble: they label five-minute noise as a daily-scale impulse and end up with an invalidation price two points from the entry. The rule is simple: the scale of the count is the one you hold the position on, and wave one on it should be at least several daily ranges long, not a single candle.
Extension is a guideline, not a rule
One of the three waves going with the move is usually noticeably longer than the other two; most often it is the third. The word "usually" is genuine here: wave one and wave five get extended too. The guideline is worth exactly this much: if wave three has already come out longest, do not expect the same distance from wave five. It gives no invalidation price and cannot serve as a stop.
It is convenient to keep the count on the chart itself: lines mark the ends of the waves and a horizontal marks the invalidation price. It stays put when you switch scales, and that matters more than it seems: a count that falls apart when the timeframe changes is not falling apart because of the tool.
The chart and its drawing toolsFifteen impulses and how many survived
In bar replay label fifteen moves as impulses, each time writing down the number of the current wave and the invalidation price under the rules. Play forward and count three numbers: how many counts survived to wave five, how many died at the invalidation price, and how many times you wanted to relabel instead of admitting death. The third number is the most important, and it is usually larger than the first.
Wave two came down exactly to the start of wave one but not below. Is the count alive?
By the letter of the rule, yes: the rule says "does not pass the start", not "does not touch it". In practice this is the worst possible position: the invalidation price is zero away from the current price, so there is no room for a stop at all. The sensible conclusion is not "the count is alive" but "there is no trade here". The formal legality of a count and its fitness for trading are different things, and the second matters more.
Why is the third rule broken more often than the other two?
Because it is the only one concerning the OVERLAP of two distant waves rather than neighbouring ones. Wave one and wave four are separated by two waves and usually by weeks of time, during which the count accumulates confidence. When the overlap finally happens it feels a shame to give up — and the diagonal appears. Practical conclusion: mark the price of wave one's end with a horizontal line straight away, so that a breach shows up as a fact rather than as a topic for discussion.