An impulse is defined as a strong move whereby the market moves quite strongly or heavily in one direction, covering a great distance in a short period of time.
Typically, when there's a trend reversal occurring, we require an impulse in the opposite direction of the trend, indicating to us that there's a possible trend reversal. The question we face now is "What does an impulse need to look like for there to be a trend reversal?". Throughout my years in trading, I've found that if a significant level is broken during the impulse, we can expect a follow through of that impulse after a brief correction or a retest.
In the Impulse diagrams, you can see that I've marked out a recent significant level where price reacted. When there was an impulse, I kept an eye on the level to see if it breaks. If it did not break, I can assume that the impulse wasn't strong enough to create a trend reversal and it is merely a bigger more aggressive correction.
However, if the level did break along with the trendline, we can assume that there is a trend reversal taking place and we should keep our focus on the key level and price action for corrections such as flags, , channels etc.
Please see chart updates for examples of Impulsive Breaks and how to trade them.
What is a Correction?
A correction is defined as a relatively short-term movement of the market in the direction opposite to the main trend.
To identify whether a break of a trendline is an impulsive break of corrective break, we must also identify the key level by looking at a significant level where price reacts. If the impulse that breaks the trendline does NOT break the level, we can assume that the trend isn't ready to reverse yet and it is a corrective break. Often a corrective break ends up with an impulse breaking the significant level, at which time we can look for a correction to take our trade.
See chart updates below for examples of corrective breaks and how to trade them.
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As always, Goodluck and trade safe!