Impulsive and Corrective Price Action

What is an impulsive move?

We can describe it when the market is very strong moving towards one direction, covering a very large distance within a short duration of time. It is a clear indication of an imbalance between the sellers and buyers since one side tends to be more active than the other.

It is clear that during impulsive moves, a lot of money is made. The risk is very low providing traders with more opportunities since the market can stretch in one direction more rapidly. However, it should be clear to us that we want to move along with the moves, not against them. Being so, there are some things we should put into consideration. This will help us know when the impulsive moves are in progress or starting.

-Large candles or bodies: A clear indication that there is a strong participation. Behind the candle, there is an order flow. If the imbalance is very strong, this will translate into making larger candles than normal. They will form in one direction and since the larger players are behind them, they will guide us towards the direction we want to take.

– Single color: Mostly this communicates how the bulls and bears were able to able to maintain the price control during a particular time.

It is important to consider price action not just from a structural perspective. Price also changes within time and it provides us with a lot of information.

-Closes towards highs or lows of the move: If you think about it, when there is a close towards the low of the candle in a down-move, this tends to communicate very little profit taking. If the bears in control were worried about the other side of the market, perhaps a key level and possible buyers coming up, they would likely close their position. This would produce a rejection and wick of sorts, but with little or no wick on the close in the direction of the move, this communicates little profit taking and likely continuation.

What is a corrective move?

They are quite easy to spot as they are the opposite of impulsive moves. Meaning – they tend to have smaller candles, a mix between the colors, closes more towards the middle with larger wicks.

Luckily there is a general pattern between impulsive and corrective move which can be seen as follows.

  • Impulsive moves about 75% are followed by corrective moves: The following corrective moves can either be horizontal, against the impulse move or the same direction.
  • 75% of the time, these corrective moves are followed by impulsive moves in the same direction as the original impulsive move because those who are in control will remain in control until they meet an opposing force with some strength to push back on their direction. But, if they fail in the second attempt to take out a key level, they tend to get a pull back.
  • This series between the impulsive vs. corrective moves will continue until the market encounters a counter-trend impulsive move which shows a greater or equal force on the other side of the market.

In Summary

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.

Source by Chris Capre

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