Wave impulses correspond with the crowd's emotional participation. A surging 1 st wave represents the fresh enthusiasm of an initial breakout. The new crowd then hesitates and prices drop into a countertrend 2nd impulse. This coils the action for the sudden eruption of a runaway 3rd wave. Then after another pullback, the manic crowd exhausts itself in a final 5th wave blowoff.
Traders can capitalize on trend waves with very little knowledge of the underlying theory.
Just look for the 5-wave trend structure in all time frames. Locate smaller waves embedded in larger ones and place trades at points where two or more time frames intersect. These cross-verification zones capture major trend, reversal and breakout points. For example, the 3rd wave of a primary trend often exhibits dynamic vertical motion. This single thrust may hide a complex 5-wave rally of the next smaller time frame.