Impulsive Vs Corrective
If you have ever come across Elliot wave theory, you might have heard about these two words, ‘Impulsive moves’ and ‘Corrective moves’. I’m not a great fan of other aspects of the EW theory, but Impulsive moves and corrective moves form some foundation of my trading. Let me introduce some theory behind these two. Don’t some complicated rocket science. They are pretty straight forward.
1) Characteristics of Impulsive moves/swings :-
Strong and powerful.
These swings are made up of candles with relatively larger bodies.
The candles in the swing are overly bullish/ bearish. ie. most of the candles in the swing are of the same color.
These swings generally break the recent swing high/low.
2) Characteristics of Corrective moves/swings:-
Slow in pace
These swings are made up of candles with relatively smaller bodies
Not overly bullish/bearish. Sometimes we can see the same colour weak candles, and sometimes we see a mixture of bullish and bearish candles.
These swings generally just retrace some portion of the previous impulse move.
Now that you know the characteristics of these impulsive and corrective moves, let me show an example. As of now, just focus on the information that is already printed on the chart. Don’t worry about the anticipatory stuff to make yourself clear with these concepts.
Look at the following image. Black arrows represent impulsive moves. Red arrows represent corrective moves.
Don’t make it rule-based. Just go with your eye. Impulsive moves are strong, extends a lot, and moves quickly. Whereas corrective moves are not that convincing.
I know.. I know.. You might be saying that it looks clean in hindsight charts. But what about the live markets?
I am the first person who hates presenting concepts with hindsight examples. But the thing is, once you install the concepts in your mind and train your eye to distinguish impulsive and corrective swings, you can project your knowledge to see things from the near term future. It’s like learning vocab in a language without bothering about the permutations and combinations of a particular word, and then framing sentences when there is a need to use it.
There is nothing new I have explained till now as you might have already come across these concepts by now. The real question is, how can we use this information in our trading?
1) Defining a trend:-
An impulsive move, followed by a corrective move and which is followed by another impulsive move. The trend is in the direction of that impulsive move. Check out the image I have attached above.
An impulsive-impulsive combination or a corrective-corrective combination generally ends up as a range. Check the trend structure when you see these combinations because trying to trade the ranges thinking that it is a trend is a reason behind most of the failures in day trading.
2) Filtering out the trades that have limited profit potential:-
Restricting yourself from trading only impulsive moves saves a lot of psychological capital and improves your trading stats in the long run. It’s hard to set the targets if you are trading corrective moves as we can’t say how far they move from the entry point. They can reverse pretty quick without giving you the time to prepare for an exit, giving you a loss or a BE result.
No matter how good you trade, you can’t pick the impulsive moves 100% of the time, and some of your trades end up as corrective swings giving you BE trades, small losses etc. That’s just part of the game.
3) While reviewing the trades post market:-
You might be bored with me saying how much I love reviewing my trades than actual trading. But I really do. The first question that I ask myself while reviewing the trades post-market is,
“Is this trade/setup placed me in an impulsive move? Or it ended up as a corrective move?”
If that is a corrective move, that definitely means that I was blinded from some information during live that forced me to take that trade. (I will be happy with breakeven or some positive result if the swing ended up as corrective because it says that I managed the trade well. No regrets on missing paper profits of corrective moves)
That blindfold might be tied by improper trend structuring, or due to lack of patience to wait for a better trade, or some other psychological block like greed, fear of missing blah blah blah.. I think you got the point.
The truth is, If I can consistently pick one or two impulsive swings (in TTF, 5min. ) in a day per scrip I track, that is a great achievement for me. Scalpers might disagree with this as they like to trade every swing that moves few ticks. But as a swing trader, I restrict myself to trades that have good profit potential, allowing me to set decent targets from the price action visible in the TTF chart, and moves quickly towards them causing less psychological damage. That being said, trust me. I take a lot of BE trade that you can imagine.
4) Grading the trades post market:-
You can grade your trades/setups like the way I do.
Grade ‘A’ – The traded swing is impulsive, it hit the first target and decently extended beyond T1
Grade ‘B’ – The traded swing is impulsive, it hit the first target and not extended that much after T1.
Grade ‘C’ – The traded swing is impulsive, but it didn’t hit the targets. (Can be a losing trade)
Grade ‘D’ – The traded swing is corrective, and the result is not negative.
Grade ‘E’ – The traded swing is corrective and a loss.
Just play around the grades by the combinations with the things you feel important for your trading, like, location of the trades with respect to SD level or SMA and stuff.
Once the grades are given, try asking questions like, why I have taken these trades? what I was thinking about at that time? etc. and write them in the trading journal, and visit that journal often.
After a while, you will end up with a lot of grades ‘A’, Grade ‘B’ and grade ‘C’ trades that are good enough to make you consistently profitable in the long run.
Every 10-20 tick swing looks like a missed opportunity if you don’t know what exactly you are looking to catch, that affects you psychologically for the next trade. The game is all about saving the financial and psychological capital for the next best opportunity.
I would like to give some pointers to use in the live markets before concluding this topic.
When you are waiting for trade, ask these three questions.
Is the current swing in the TTF impulsive, or corrective?
What’s the direction of the next impulse swing? And what are the likely price levels that the impulse swing might start?
Can I take a trade in the next impulse swing? Or is it better to wait for some time?
Don’t take trades against impulsive swings unless you have strong reasons to do that. Think twice.
An impulsive move is followed by a corrective move and vice versa.
It happens only in a trending environment. But the market stays in ranges 70% of the time. So don’t blindly take a trade against all the corrective moves, especially when the market is ranging as you will end up in taking intra range trades that are very risky.
It’s totally ok if you miss some impulsive swings, or you end up taking some corrective swings. It’s not about perfection. It’s just about learning and moving forward saving our ass.
Don’t put every 10-20 tick swing under missed trade category while reviewing in hindsight. Some corrective moves extend much more than that and it is ok to sit on the sidelines when the market is doing that. The moment you call something as a missed opportunity, you try to find reasons how you could have caught it. The poor market always gives you reasons in hindsight how you could have done better. The next time you see those reasons, it gives you a loss as you are trying to trade the corrective moves. I don’t need to tell you how you mess things up in the session once you faced a series of losses and BE trades that have shown some paper profits.
These are things where I use corrective and impulsive moves in trading. Feel free to add your own after backtesting.
P.S:- I don’t use anything other than this impulsive and corrective moves from the EW analysis in my trading. No wave counting and no Fib. ratios.