← Learn · Lesson 03 of 11
The five waves aren't interchangeable. Each one shows up at a different moment in the crowd's mood, and each has a job to do. Learn the personalities and a chart stops being a squiggle; it starts telling you which move you're looking at, and how much to trust it.
- Wave 1The doubted push. The first move off a bottom. It looks like just another bounce, and almost nobody believes the trend has turned. Quiet, unloved, easy to miss.
- Wave 2The retest. Gives back much of Wave 1 as the old bears press their case one last time. Deep, scary, and the reason most people miss the whole move: it feels like the bounce failed.
- Wave 3The obvious one. The strongest, longest, most powerful leg. The news catches up, the crowd piles in, and the trend becomes undeniable. This is where you trade with size.
- Wave 4The pause. A sideways, frustrating consolidation that shakes out latecomers. Usually shallow. Sets up the last leg.
- Wave 5The last leg. Often looks great (new highs, loud optimism) but momentum is quietly fading underneath (fewer stocks participating, weaker thrust). The riskiest place to chase.
- A–B–CThe unwind. The three-wave pullback. B-waves fake a resumption of the trend and trap the hopeful; C-waves punish them. Personality matters here too.
The trade in one line
You trade a Wave 3 with size and a Wave 5 with a finger on the exit. Same chart, opposite posture: the difference is entirely which wave you think you're in.
This is why the count matters even when the direction seems obvious. "It's going up" isn't a plan. "It's a Wave 3, so I press it" and "it's a Wave 5, so I trail a tight stop" are two completely different trades on the same green candle.