What are Corrective Waves
Corrective waves are a set of stock price movements associated with the Elliott Wave Theory of technical analysis. This theory reports that security price movements are broken up into two types of waves, motive waves and corrective waves. Together motive waves and corrective waves can be used to discern the short-term price movements of securities. Within a short-term pattern, motive ways are known for moving with the trend while corrective waves move against the trend.
BREAKING DOWN Corrective Waves
Corrective waves are an important component of the Elliott Wave Theory which was developed by Ralph Nelson Elliott in the 1920s. (See also: Introduction to Elliott Wave Theory) The Elliott Wave Theory offers helpful insight on following technical analysis trends across short-term price patterns. The Theory is based on the concept that for every action there is an equal and opposite reaction. This concept is often demonstrated in the securities market where prices are determined by market makers and investors.
Elliott Wave Theory
After development of the Elliott Wave Theory in the 1920s, Ralph Nelson Elliott discussed the Theory in his 1938 book, “The Wave Principle.” The Theory was also expanded by A.J. Frost and Robert Prechter in the book, “Elliott Wave Principle: The Key to Stock Market Profits.”
The Elliott Wave Theory is based on two types of waves, motive and corrective, which are the result of volatile market trading. Given the mechanisms that drive security prices over the short-term, Elliott observed that in general for every forward price movement there is typically an equal and opposite reaction that causes prices to oscillate over time. This observation led to the development of two types of waves and the 5-3 combination which forms the basis for the Elliott Wave Theory.
Motive waves are waves that occur in the direction of a trend. This wave can be seen through the combination of five waves moving in various different directions while comprehensively following a specific trend.
Corrective waves are waves that occur against trend. They follow motive waves and comprehensively move in the opposite direction. These waves typically consistent of the three waves in the 5-3 combination with comprehensive movement against the trend.
Elliott Wave Inferences
Overall the Elliott Wave Theory provides constructive insight that can help technical analysts monitor and understand the movements of stock prices over the short and long-term. According to the Elliott Wave Theory, motive waves typically occur over longer timeframes while corrective waves occur over shorter timeframes. By discerning the difference between motive ways and corrective ways, a technical analyst can better differentiate which price movements are occurring according to a trend and which price movements are occurring primarily from competitive market making.