What are Corrective Waves
Corrective waves are a set of financial asset price movements associated with the Elliott Wave theory of technical analysis. This theory posits that security price movements are broken up into two types of waves: impulse waves and corrective waves. These two types of waves can be used to discern price trends of securities. Within a wave pattern, impulse waves move with the trend at one-larger degree while corrective waves move in the opposite direction.
BREAKING DOWN Corrective Waves
Corrective waves are an important component of the Elliott Wave theory, which was developed by Ralph Nelson Elliott in the 1930s. (See also: Introduction to Elliott Wave Theory.) The Elliott Wave theory offers helpful insight on financial market price trends and patterns.
Elliott Wave Theory
R.N. Elliott introduced the theory in his 1938 book, The Wave Principle. The theory was re-introduced to Wall Street in A.J. Frost and Robert Prechter’s 1978 book, Elliott Wave Principle: Key to Market Behavior.
The Elliott Wave theory is based on two types of waves: impulse and corrective.
Impulse waves are waves that net move in the direction of the trend at one-larger degree. Impulses consist of five sub-waves.
Corrective waves are waves that net move against the trend at one-larger degree. Corrective waves typically consistent of three sub-waves.
Elliott Wave Inferences
Overall, the Elliott Wave theory provides constructive insight that can help technical analysts monitor and understand the movements of financial asset prices over the short and long term. According to the theory, both impulse and corrective waves occur over all scales and timeframes as components of a hierarchical fractal. By discerning the difference between impulse waves and corrective waves at several degrees of trend, a technical analyst can better differentiate which price movements are occurring with a trend and which price movements are occurring against a trend.