Regardless of how strong a long-term market trend is, the market never moves only in the direction of the long-term trend – there are always minor movements against the long- term market trend. These deviations usually don’t last very long and after them the market moves again in the direction of the long-term trend.
The major market movements in the direction of the long-term market trend are called impulsive waves and the minor market movements against the long-term market trend are called corrective waves.
The picture below shows a snapshot of a EUR/USD candlestick chart. Although the market shows both upward and downward market movements it can be easily recognized that the long-term market trend is clearly bearish as between 07:00 AM and 11:00 AM the price failed around 140 pips (from 1.3500 to 1.3360 , that is 1.3500 - 1.3360 = 0.0140 = 140 pips). The waves (1), (3) and (5) are the impulsive waves; the waves (2) and (4) are the corrective ones.
We have used the phenomenon described above as a starting point to develop a completely original and until now unpublished trading strategy that combines basic principles of Elliot Wave theory together with well-known properties of
Fibonacci ratios. The result is amazing, as you will soon find out. We have named
the strategy “Impulsive/Corrective Wave Retracement (ICWR) Trading Rules”.
While going through the trading example below you will realize that the part of our strategy related with the exit signal follows the fundamental trading rule “cutthe losses short and let the profits run” - in a way that was never accomplished
Because not letting the profits run will make your trading unprofitable in the long run: two losses of 50 pips followed by a win of 80 pips results in a net loss of 20 pips. In contrast two losses of 50 pips followed by a win of 250 pips, reachable with our strategy, results in a net win of 150 pips! I’m sure you get the point.