Fourth Waves

Fourth waves are one of my favorite waves within the five waves structure because they follow a third wave which usually is extended and identifying the end of a third wave is tricky. A normal extension for the third wave implies 161.8% to be only the minimum requirement, not the target for the whole move. So the actual end of the extended wave is not easy to find, and that makes the identification of the starting point for the fourth wave difficult.

Typically retracement levels for the fourth wave in an impulsive move are between the 38.2%-50% levels out of the previous third wave and this is a good indicator when looking for a bounce for price. That means you may look at the retracement levels to be touched and then trying to analyze the whole move/pattern/structure for the wave.

Another approach will be to look for a 38.2% level as a possible ending point for the corrective wave. For example, one of the most common corrective forms this wave is taking is a contracting triangle. Well, after the first wave from that contracting triangle you should look for the 38.2% retracement level as the possible end of the contracting triangle, and of the fourth wave.

One other important characteristic of this type of correction is that it should alternate with the second wave in the time taken for price to consolidate, the severity of the move, it’s amplitude, and even their structures. So, for example, if the second wave is a zig-zag, than look for the fourth wave to be either a flat or a contracting triangle. And the opposite is valid as well. If the fourth wave is consolidating in the form of a contracting triangle than look back on the second wave to look for alternation to be respected.