Understanding Impulsive And Corrective

Price Action
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 15444 Views

Chris Capre
Verified Profitable Trader

If I had to follow only one simple rule of price action, it would be to understand
impulsive and corrective price action, and if I could only trade one type of
move, it would be impulsive moves hands down. They offer the most profit
potential, communicate where the institutional players are buying and selling,
whether they are buying or selling, and what the dominant trend is.
This is not to say one cannot make money trading counter-trend, but that far
more money and profit will be had trading with the trend, but to be more
specific – trading impulsive moves.
The Base of the Pyramid
If I had to look at price action as a structure, it would be a pyramid, with the
base being how price action is a reflection of order flow (particularly executed
transactions). The next part (or level above) from that base would
be understanding price action through the lens of impulsive vs. corrective
moves.
I will briefly describe what impulsive and corrective moves are, giving the key
characteristics of each type of move. Then I will discuss what they generally
communicate from an order flow perspective. After this I will talk about what is
the general pattern they will form, and how you can use this for trading
impulsive moves.
What Is An Impulsive Move?
An impulsive move is one whereby the market moves quite strongly or heavily
in on direction, covering a great distance in a short period of time. These
moves tell you when the imbalance between the buyers and sellers is really
strong and there is heavy participation from the institutional side.
Logically, more money can be made during these impulsive moves, as they
cover more points or pips in less time. They are generally more volatile, and
thus provide us with great opportunities to get more R (reward) with less risk
since the market will stretch more easily in one direction. But no matter what,
we want to be trading with these moves as much as possible, not against
them.
Three Characteristics
Impulsive moves tend to have three characteristics common among all of
them. These three can help clue you in to when an impulsive move is starting,
or in play. They are;
1. Large Candles (bodies)
2. Mostly of one color (blue/bullish, or red/bearish)
3. Closes towards highs/lows of the move
Let’s examine all three points.
1) Large Candles communicate to us there is strong participation and order
flow behind this particular candle. Strong imbalances during a candle will
translate into larger candles than the norm. When you see large candles
forming consistently in one direction, they indicate strong order flow behind
them from the institutional side. Since the larger players are behind them, they
give us a clue of the direction we want to take, essentially surfing the waves
they (institutional) are creating. Take a look at an example below.
Image 1.1 – EURUSD 1hr Chart

Notice how in this chart, the candles that stand out the most are the red ones,
particularly the ones towards the top left? They are the largest in this entire
series, communicating strong order flow behind them.
In fact, if you look at candles 1-8, all but the blue doji in the middle are solid in
size. Yet candles 9-17 are all contained within the highs and the lows of last 2-
3 candles in this down leg, communicating weak order flow and participation
behind them.
As a whole, impulsive moves tend to have large candles (bodies and wicks)
behind them.
2) Mostly of One Color – this ingredient is also common among impulsive
moves as it communicates something critical to us – time. More specifically,
how the bulls or bears were able to maintain control of the price action over
time.
In the chart above from image 1.1, you will notice in the down leg, there is only
1 blue candle, meaning for 8 out of 9hrs, the bears had complete control of the
market (almost one full trading session).
By maintaining control over time, the market is communicating who is the
more dominant side because they are not allowing the other to take control of
a candle for that time period. The greater the imbalance is between the bulls
and bears over time, the greater the dominance is from either the bull or bear
side of the market.
It is important to look at price action not just based on structure of the candles,
which is one dimensional. Price doesn’t just move in a vacuum, it moves in
time, and HOW price moves over time can communicate a lot of information to
us as traders.
3) Closes Towards the Highs/Lows of the Move – If you think about it,
when the market is in a strong trending move, let’s say using a 4hr chart, and
the candle that closed in the direction of the trend (in this case uptrend) has a
very small wick, thus a strong close towards the highs, what does that
communicate?
It should communicate that there is very little profit taking from the players
behind that candle. If they were worried going into the close of that candle
about an upcoming resistance level holding, or perhaps the bears may take
control of the market, they would likely close their position, or take profits right
before the candle closed.
But when you have a strong close with a very small wick, this usually indicates
very little profit taking, thus a confidence the move will likely continue. This is
highly useful to us as traders, and will be common among impulsive moves like
in the chart below.
Image 1.2 GBPUSD 4hr Chart

Starting with the top left of the chart using candles 1-4, the price action moves
in a sideways corrective fashion until candle 5, which if you notice, increases in
size tremendously (rule #1 of impulsive moves). From here, price continues on
selling for the next 9 candles, 10 total in a row, or 40hrs of selling (rule #2 of
impulsive moves).
But looking at the candle closes, you can see most of them are towards the
lows, showing very little profit taking along the way, thus suggesting likely
continuation.
Only until candle 11 do we get a strong rejection, and from here price then
moves sideways in a corrective fashion until candle 16. But what happens at
candle 17?  The candle expands (rule #1) telling us the trend will likely
continue.
So these are three examples of the common characteristics of impulsive price
action moves.
What About Corrective Moves?
The good thing about corrective moves is they are easy to spot, since they
have the inverse characteristics of impulsive moves. Meaning, they tend to
have;
1. Smaller Candles
2. Greater mix between red/blue or bull/bear candles
3. Closes more towards the middle with larger wicks
Thus, if you apply the logic of impulsive moves, you can easily understand and
identify corrective moves.
How Do They Relate to Each Other?
Generally, impulsive and corrective moves tend to have a common pattern or
dance with each other.  The general pattern that tends to play out between
them is the following;
1) Impulsive moves about 75% of the time are followed by corrective
moves.  These corrective moves can either be horizontal, slightly against the
impulsive move, or even slightly in the same direction, but they denote a
change in the order flow and participation.
2) 75% of the time, these corrective moves are followed by impulsive
moves in the same direction as the original impulsive move.  Why?
Because those who are in control, rarely give up control unless encountering a
strong counter-trend force.  Even then, they usually make a second attempt to
take out a recent swing high or low before giving up.
Only when they fail a second time will they usually exit the market, either
waiting for a new chance to get in on a pullback, or reset completely.  This is
why V-Bottoms are quite rare and only form about 10% of the time.  Usually
there is a 2nd bottom, which is could be a LL (lower low), HL (higher low) or a
similar low.
3) This series between the impulsive vs. corrective moves will
generally continue until the market encounters a counter-trend
impulsive move, which usually translates to an equal or greater force on the
opposing side of the market.  Very similar to Newton’s Laws of Motion about an
object in motion will stay in motion until acted upon another object with equal
or greater force.
Let’s look at an example below.
Image 1.3 AUDUSD 4hr Chart

Glancing at the chart above starting with the bottom left at move A, you can
see how it was an impulsive move, followed by a corrective move (B).  This
series continued until…it hit a counter-trend impulsive move in G.  It was only
until here did the bulls finally relent control as the opposing bears took control
of the price action with the bulls likely taking profit or exiting all together,
especially after the low point from move D was taken out.  Ironically, what
followed move G, was a corrective move after, followed by the bears
continuing the down-leg.
An Example Trading Impulsive Moves
Today gave a really good example trading an impulsive move. Gold was a
perfect example of a textbook impulsive-corrective series, offering a great
setup to go short for a large reward to risk play.
Take a look at the chart below which is the 1hr chart on Gold. Starting with the
top left of the chart, we can see a consolidation over line A which is a
corrective move.  Then at candle 1, we have more selling in one hour than
total buying for the last seven, which starts an impulsive leg down at B, selling
off about $25 in 10hrs.
At candle 2, we see a corrective move (C) whereby price climbs about $8 in
12hrs, so less than 1/3 the climb from move B which took more time.  This is a
clear example of how its less profitable to trade counter-trend than with trend.
This is not to say we cannot trade counter-trend, but there is far less money to
be made.
Image 1.4 Gold 1hr Chart

The corrective move at C ends with a pin bar rejection just $.50 below the
20ema, then starts another impulsive leg down at 4, dropping over $18 in 3hrs,
also ending with a large pin bar.  I actually bought off the lows and made a
quick profit, but there was far more profit to be made in less time selling from
3 or 4, then buying off of 5.
In terms of knowing whether to buy or sell, if you can learn to find an impulsive
move, followed by a weak corrective move, often times that corrective move
will offer a pullback setup into the 20ema or a prior support/resistance level.
These offer high probability low risk high reward setups.  Anyone selling the
pin bar rejection at 3, or the pullback into the 20ema at 4, with a tight stop
above the 20ema, targeting either the low at 2, or waiting for the pin bar close
at 5 would have made anywhere from a 3:1 reward to risk, up to 12:1 reward
to risk.
These opportunities show up in the market all the time, and if you can learn to
read them, you can make a considerable profit by trading with the institutions
impulsive buying or selling.  This is why it is critical to learn to read these
moves, as they will help you not only trade in the right direction, but find
highly profitable setups.
In Summary
This is just an introduction to how I approach price action and how I use this
model as a base for understanding price action.  When you can learn to read
 impulsive and corrective moves, you will find they are highly effective for
many things, such as;

 finding the right direction

 staying in the trend
 spotting great pullback opportunities to get back in with trend
 knowing when the market will continue and when the market is likely to
reverse
 how to find some of the more profitable moves in the market (impulsive)
 knowing who is in control of the market
and more…
There are many other facets and subtleties to trading impulsive and corrective
price action, but this is a good introduction to my base theory and model
for trading price action.  If you can learn to spot the impulsive and corrective
moves in the market, they can greatly enhance the odds of your trades along
with helping you spot key characteristics in the markets.

3 Crazy Simple Ways to Trade Impulsive and

Corrective Waves

 By Justin Bennett

 / May 25, 2016

1 Shares
When it comes to Elliott Wave Theory, you either understand it, or you don’t, there is no in
between.

In the same way, those who understand it either find value in it or they don’t.

Having been a student of the financial markets since 2002, I can tell you I don’t subscribe
to Elliott Wave principles, at least not in the full meaning of the term. It’s far too convoluted
and ambiguous for my taste.

Don’t get me wrong; I’m not saying it doesn’t work. I’ve been around the markets long
enough to know better than to speak in absolutes about what does or doesn’t work.

After all, achieving consistent profits as a trader isn’t about finding the best trading
strategy, it’s about finding the strategy that works best for you.

Exclusive Bonus: Get access to the PDF cheat sheet that will show you how to use
impulsive and corrective moves with price action to stack the odds in your favor.
But the truth is, as price action traders we use a portion of Elliott Wave every single day.
You may not even know it exists, but it’s present in everything we do.

Get Instant Access to the Same "New York Close" Forex Charts Used by Justin
Bennett!
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I’m referring to the notion of impulsive and corrective moves.
If you aren’t entirely sure what those are or how they can aid you in your trading, it’s okay.
By the time you finish reading this lesson, you’ll know three simple yet effective ways to
use these moves in combination with price action strategies to help stack the odds in your
favor.
Let’s get to it!

The Ebb and Flow of a Market

First things first, to fully understand the meaning of impulsive and corrective waves, you
need to know that every market ebbs and flows in harmony with daily events.

Those events include everything from the interest rates that are set by central banks to
natural disasters.

The “ebb and flow” as it’s often called, is the visual representation of how markets
respond to and sometimes counteract those daily events.
Why does this matter?

It matters because it’s what allows us as technical traders to buy at support and sell at
resistance.
Think of the ebb and flow as the regular and often repeatable manner in which every
financial instrument moves.

The more in tune you are with it, the more money you stand to make.
As much as I’d like to say it’s something that can come from a textbook, I can’t do that.
Every profession, whether it be trading, medicine, law or any other desirable career has
certain limitations as to the skills that can be acquired through written words alone.

The rest has to come from experience. In your case, screen time.
At the risk of sounding cliche, if you want to become a great trader you have to become
one with the market’s ebb and flow. You need to eat, sleep and breathe price action until
spotting trends, drawing critical levels and identifying favorable patterns becomes second
nature.
Only then will you have the “x factor” necessary to achieve consistent profits.

The good news is that I can help. I can show you what to pay particular attention to while
you rack up said screen time, and it all starts with a market’s ebb and flow.

Keep these points in mind as you navigate through the following sections. The material
below is the foundation for every profitable trade ever taken, regardless of the strategy
that was applied.
Impulsive Moves: Using Momentum to Your Advantage
These are the moves or waves that best represent the direction of the current trend.
During an uptrend, the impulsive moves are those that push prices higher. The opposite
applies to a downtrend where the impulsive waves are those that drive prices lower.
These impulse movements are often made up of large candlestick bodies and are typically
quite aggressive, especially compared to corrective moves.
Here’s an example of three impulsive bearish moves on the AUDUSD daily chart.
As you can see, these impulse movements are swift and aggressive. As such, these
areas offer the greatest profit potential in the least amount of time.
But things aren’t always as neat and tidy as the AUDUSD chart above. In fact, more often
than not these movements vary in size as well as angle.

Take the USDJPY weekly chart below as an example.

During an uptrend, these impulsive waves push prices higher in a relatively short period.

However, notice how the second rally above is much smaller than the other two. You could
even argue that the entire middle section of the chart was corrective.

But as is the case with most topics in the Forex market, it’s somewhat open to
interpretation.

In summary, impulsive moves within a downtrend are comprised of mostly bearish

candles. Alternatively, impulsive bull moves, like the USDJPY chart above, are made up
of mostly bullish candles.
Corrective Moves: Capitalizing on the Breakout
On the opposite end of the spectrum, we have corrective moves or waves that work
against the prevailing trend. These counter-trend moves represent a period of
consolidation and are typically weaker and less aggressive than the impulsive waves we
just covered.
A corrective move during an uptrend is characterized by a move lower or even sideways.
Unlike impulse movements, corrections are formed by a mixture of bullish and bearish
candlesticks where the bodies are relatively small.
Here is the same AUDUSD daily chart as above, only, this time, we’re focusing on the
corrections.

Notice how the two areas above include a mixture of both bullish and bearish candles, a
common trait of most corrective movements.
They also developed against the prevailing trend and at a less severe angle. These are
telltale signs of corrective moves that have the potential to be continuation patterns. More
on this later.

Next up is the USDJPY weekly chart we studied previously.

Just like the impulsive moves above, we can see that these corrections aren’t always
uniform. They can take on various shapes and sizes, but what’s important is the meaning
behind them.
Each area highlighted above occurred following extended rallies and moved at a less
steep angle than that of the impulsive waves.

These characteristics signal that buyers were taking profit during these periods, thus
creating a level of indecision that formed a pause in the uptrend.
In summary, corrective moves are typically comprised of a mixture of bullish and bearish
candles. The same goes for both uptrends and downtrends.
1. Intermediary Price Action Signals
What is it about the pin bar that makes it such a profitable candlestick pattern?
Is it how the candle forms or its location in context to the surrounding price action?

An argument can be made for both as the most profitable pin bars are distinct and also
occur at key support or resistance.
But here’s the deal…

A perfectly formed pin bar in the middle of nowhere is useless. Sure, it may trigger a move,
but it doesn’t have what we need for it to be tradable.
On the flip side, a decently formed pin bar at an obvious level of support or resistance can
be extremely profitable.

Therefore, we can say that the location of a pin bar is more important than how the
candlestick forms.
Here’s an excellent example of two well-formed pin bars that occurred at prominent levels
in the market.
What made these two patterns work as sell and buy signals respectively are the levels at
which they formed.

Sure, the pin bars are also perfect, but those same candles at arbitrary prices wouldn’t
trigger the same favorable follow through.

While these were no doubt profitable setups, a ranging market isn’t always the best when
looking for price action signals.

Why is that, you ask?

The lack of a directional bias creates uncertainty. For this reason, trade setups that occur
within a strong trending market are almost always the better option.

With this in mind, it’s best to identify the trend first and then watch for bullish or bearish
price action at key levels. By doing this, you’re able to leverage the momentum of the
market to help ensure follow through once you’ve taken a position.
We can, therefore, say that the very best pin bars are the ones that occur at the end of a
corrective move and form at support or resistance. The idea is to position ourselves to
catch the next impulsive wave as soon as it begins.
Here’s an excellent example of one such pin bar that occurred on the EURUSD weekly
chart.
 Four factors contributed to the success of this bullish pin bar:

1. Strong uptrend making higher highs and higher lows

2. Mild correction from the bullish trend

3. Key level of (new) support

4. Well-formed pin bar at said support

In summary, the ability to determine where a trend is in its lifecycle will allow you discover
price action signals that provide follow through.

2. Corrective Waves as Continuation Patterns

Using corrective moves to identify breakout opportunities has become my favorite method
of identifying setups over the last few years.
Why is that?

It’s because a corrective move is nothing more than a market hitting the pause button.
This “pause” in the price action allows me to reassess the situation and determine
whether any favorable patterns exist.

But there are a few choice technical patterns that work the best.

These include the bullish or bearish flag along with the wedge. And the great thing about
using these formations, especially the bull and bear flag, is that they occur more often
than you might think.
Again, it takes practice, but a Forex trader can easily make a living from trading nothing
but flag patterns. In fact, I’ve met a few who do just that.

So why are these continuation patterns so lucrative?

Because joining an established trend takes half of the guesswork out of what we do as
traders. You know the momentum is there which means all you have to do is find a
favorable entry and profit target.
The momentum takes care of the rest.

Okay, let’s dig into a couple of examples to see how these corrections can offer a chance
to join an established trend.

Do you remember the USDJPY weekly chart from earlier? Well, here is the first corrective
move as it appeared on the daily time frame at the time.
The wedge pattern you see above offered an exceptional opportunity to get long following
an extended corrective move.

Everything between support and resistance is considered consolidation and is, therefore,
labeled as corrective within the broader uptrend.

And here is the second period of consolidation as it appeared on the daily chart.
Again, another wedge pattern that ultimately triggered a massive rally.

Note that in this case, the pair not only carved out a wedge pattern but also formed a
bullish pin bar following the break from consolidation.

As such, we can call the chart above a blend of the first two strategies in this lesson.
3. Transitional Reversal Patterns
You now know that the study of impulsive and corrective movements can lend itself to
help you find favorable momentum plays.

But all trends, regardless of how healthy they appear, must eventually come to an end. It’s
during these transitional periods that we can use the same concepts to discover reversal
plays.
A reversal pattern such as a head and shoulders and its inverse are indications that a
trend is tiring. In other words, they signal a potential change in sentiment and momentum.

Here’s an example of a topping pattern on NZDJPY that we recently traded.

After several weeks, the structure above provided us with a 1,000-pip profit.
But chances are you’re familiar with how to trade the head and shoulders pattern. What
you may not know are the forces at work that make the formation profitable, namely how
impulsive and corrective moves play a role.
So let’s view the same NZDJPY weekly chart from a different perspective.

What makes this pattern so lucrative are the forces at work behind the “head” of the
structure.
Within this one swing high was the last impulsive bullish move as well as the first
impulsive bearish move in over two years.
This first bear move gave rise to the first bearish corrective move, which is designated by
the larger red area in the chart above. You can then see the steep decline that transpired
immediately following the break below neckline support.

Now, because we’re studying the ebb and flow of a market rather than technical patterns,
it’s important to keep in mind that reversals come in all shapes and sizes. They aren’t
always a clear head and shoulders, double bottom, etc.
Take the USDCAD daily chart below. Here we have a bullish pin bar/rejection bar that
formed at new support. This formation came after the pair carved out its first impulsive
bullish move in several months.
This particular setup was one that was covered here at Daily Price Action and also traded
by several members.

So what made me think this level would hold?

The fact that it had already played a significant role over the previous twelve months was
a good starting point.
But it didn’t end there. The recent rally from a multi-month low looked impulsive, at least
compared to the other corrective moves of late.
Notice how the rally in blue occurred at a much steeper angle and for a longer period than
the other corrections shown. This led me to believe that USDCAD was on the cusp of a
rebound.

Combine that with the bullish candle at key support and we had a favorable opportunity to
trade a reversal.

What we’re studying here is the relationship between price and time. Said another way,
we’re reading the angles of the market to help determine whether buyers or sellers are in
control.
So there you have it. The study of impulsive and corrective price action extends beyond
the realm of identifying favorable trend continuation signals. The same movements can
also be used to discover exhaustion patterns that lead to an extended move in the
opposite direction.
Now It's Your Turn
I hope you can see the potential of using impulsive and corrective waves in combination
with simple price action.

Yes, it takes hard work, dedication and no small amount of time.

But the difference here is that you’re using momentum to stack the odds in your favor
(unlike other trading strategies that have you pulling the trigger then hoping things go your
way).

Ready to take control of your trading?

Click the link below and enter your email to get access to the free Impulsive and
Corrective Waves cheat sheet in PDF form.