Ross Maxwell - Impulsive vs Corrective Price Action

Ross Maxwell · Consulting · Intermediate

The first video of the series moving into practical trading. In this video Ross explores Impulsive vs Corrective price action. This includes - Breaking down what impulsive and corrective means - How to alter your trading styles to fit with each form of price action - How to identify impulsive or corrective price action - Chart analysis and breakdown of how to trade with each price action and basic support and resistance ideas. A great video to explore different market types and adapting trading strategies. If you like Ross's teaching and want to access more like his mentorships access them at this link - https://keyzonetraders.learnworlds.com/link/rEugyh

Transcript

Right, okay. So, I want to give you an easy way on how to identify where the order flow is in the market and how to sort of stay on the right side and how to adapt your strategies and stuff as well to see when we're moving from trending markets to range bound markets cuz uh basically a lot of times this sort of process gets complicated by various different names and patterns like Elliott wave theories, wedges,

um you know, triangles, pennants, um channels, you know, there's loads and loads of different ones but if we just boil it down, it can be very be translated into much more simple concept, which is what we're going to discuss in this session. And that is impulsive and corrective price action.

Okay, so a simple method to spot order flow imbalance in the markets and identify the dominant market side of the order flow is impulsive and corrective price action. Now, as I said, many traders overcomplicate it. You hear of like Elliott wave theories and as mentioned before, many different pattern names. Flags, wedges, channels, etc.

But if we focus on a simplified version of these patterns, we can then consistently recognize a dominant side in the order flow and we can therefore adjust if there isn't a dominant order dominant side in the order flow and therefore we can adjust our strategies accordingly because once you've identified what is the dominant order order flow in the market or if there isn't any,

we can then align the majority of our trades with that dominant direction or switch to a more sort of range bound type strategy. So, impulsive moves. An impulsive move shows an in clear Sorry. An impulsive move shows a clear imbalance in the market where one side is totally in control. And when we spot these moves, we want to align ourselves with that dominant side of the market.

We want to only trade with that side of the market. Now, what does this look like? We are going to look at a chart in a moment, but the characteristics of an impulsive move are that the candles are all of the same color. So, if we're in a bullish trend and a strong impulsive uptrend, then the candles are all going to be predominantly green or whatever color you have your bullish candles.

And if we're in a downtrend or an impulsive move to the downside, they're going to be predominantly red or whichever color you have as your bearish candles. They will close generally near to the highs in uptrends or lows in impulsive moves to the downside, and there will not be many wicks on show.

The momentum is generally one-sided, so candles rarely overlap. If they do, the the overlap is minimal, and candle sizes are often above the average, so they're larger in size than the general normal candle size.

Price will be pushing through support and resistance without hesitation. There won't be a lot of pushback, and retracements tend to hold the eight moving average or the eight EMA, which will be pointing in the direction of the trend and widening. So, again, we're going to have a look at this in a chart example in a moment.

If we imagine the eight EMA on the chart, it will be put in with in a downward impulsive move, that you want that EMA pointing clearly to the downside, and any pullbacks will generally hold the eight EMA and at most push back to the 20 EMA.

Now, impulsive moves are going to be generally shorter holding times, but they do offer the chance to hold runners for bigger profits. So, you can see bigger moves going to be much quicker, so you're going to have shorter holding times, but you can get really good risk-to-reward potential trades on these.

Now, corrective moves are basically the opposite of impulsive impulsive moves. They show two-way action, where neither side is in complete control of the order flow, and we look to trade from the outer edges of the structure of the range, often with a bias towards the preceding impulsive move. So, we'll go through this in a second, but generally speaking, we see an impulsive move followed by a corrective move.

The majority of the time, the next the next move out of that corrective structure will be an impulsive move in the same direction as the preceding impulsive move. So, if we stay with even in in a range-bound market, if we stay with the uh bias with the um direction of the preceding impulsive move, we still give ourselves a better chance and higher probability uh trades.

Now, the other thing to note as well is just because we enter a corrective structure, we need to identify clearly defined support and resistance areas before we actually start looking to trade. Just We don't just trade reversal strategies within the middle of a range.

We also need to determine, you know, are we in some sort of channel? We need to determine clear support and resistance zones of the uh corrective structure. And that corrective structure can take many forms. Um but then we only want to trade the outer edges of that structure, okay? The extreme edges. Now, what are the characteristics of a corrective move?

Well, or a corrective structure, the candles' colors are mixed rather than all in one uh one direction. So, you get a mix of uh great bull bullish and bearish candles. You get a lot of wicks on show on both ends because the the order flow is showing that it's it's moving two ways within uh within each uh candlestick formation. The candles will overlap a lot because there's no momentum in the market.

And the general size of the uh candle is more on the average size of the the the the normal candle size or maybe even a little bit smaller. We get a lot more like dojis, uh indecisive bars, and that sort of thing.

And price will often oscillate through flat or horizontal moving averages. So, the 8 and the 20 moving average will be relatively horizontal, and you'll see price will fluctuate back and forth above and below that. Now, these moves will take generally longer to to to complete because obviously there's no momentum with the market, so it's going to take longer for the market to move in certain directions.

You generally want to have lower risk to reward trades in this environment, and you need to manage risk and trade size more aggressively and more actively. Now, markets do not move in straight lines. So, impulsive moves are often followed by corrective moves as the other side wants to find value and it the market needs to take a breather, okay?

Now, around 70% of the time, the next impulsive move will continue in the same direction as the previous one. So, if we see an an impulsive upward move, then we see the market balance a little bit, take a breather, and we see this corrective structure form.

There's a 70% probability that the next impulsive move will be in the same direction as the previous will be an upward impulsive move, the same as the preceding one. So, because we can recognize this, it gives us a statistical edge. We can position with the more dominant side of the order flow even within the corrective structure.

Now, sometimes you do do see an impulsive move followed by an opposite impulsive move an impulsive move in the opposite direction, which is known as a V-shape recovery. So, you might see an impulsive down move and then all of a sudden the buyers step in and you see an impulsive upward move, which is which creates like a V, and that's why we call it a V-shape recovery. But that that is very very rare.

You generally see a corrective structure formed after an impulsive move. Now, you want to use the higher time frame context as well. So, if you spot an impulsive move on a higher time frame context, you want to be favoring trading in that direction on your lower time frame as well.

Even if the lower time frame is not in an impulsive move, you know, again, you can see corrective moves within an impulsive move on a higher time frame, but you want to stay with the impulsive move on the higher time frame. Now, an impulsive move on the lower time frame doesn't mean that the long-term market structure has changed or shifted, either. Okay? And that's really important.

Just because, you know, you see an impulsive move on a 5-minute chart, doesn't necessarily mean that the overall structure of the market has changed. Um impulsive moves on lower time frames can occur within corrective structures on higher time frames.

Now, experienced traders may trade against impulsive moves using key support and resistance levels on a higher time frames as well, but I would I would stress that it's really for experienced traders. When you're new to and beginning to trade, you really want to be trying to stay with that momentum and with that trend as much as possible. Um and stay with those.

So, if you if you see that impulsive move on a higher time frame, then you want to be staying with that as much as possible. But, if you see a an impulsive move on a lower time frame, don't kid yourself or try don't try and uh change your bias in terms of the overall picture of the market, because that is where you could get into trouble.

So, this is uh just a sort of like short example of an of impulsive and corrective structures within uh within one one chart, okay? So, you can see here that we've got this uh red box here, which is an impulsive move to the downside. Notice a lot of candles are red. A lot of these are finishing on the low uh lows here.

Even these retracements, they're being held by this eight moving average, which is this green candle. Um and you can see that the 20 moving average, which is the blue um the blue EMA and the green um EMA, which is the eight, they're quite wide apart. They're both pointing downwards. They're separating, which shows that we're in a strong trend.

So, even as early as this area here, this early part of price action, we can identify that we are in uh an impulsive downward trend, because we've got these uh these uh EMAs are separating. And even if we miss here on the pullback, we can start to look here and we can still catch all of this move. So, it allows us to identify early on when we're in that um in that structure, um so that we can take advantage of it.

Now, notice here we pull back. Notice what happens here very early on in this um corrective structure, the market um the uh EMAs flatten out and straight away we start seeing this mix of candles. So, even early on in this sort of structure here, we can see we're moving into a um a corrective sort of structure, okay?

So, again, whilst uh you might take a loser on any sort of pullbacks here, very early on you can tell that you're moving into a corrective structure, okay? You may sit there and say, "Okay, we're coming out of this corrective structure.

This is an impulsive move." You might get caught out on one or two trades here, but again, as soon as you start seeing this price action where it starts oscillating back and forth, you know again early on that you're in a correct that corrective structure actually remains in in play and all across here you can see that this um you know, the the momentum doesn't shift. You're staying in a corrective structure.

There's a mix of the candles, um you know, all of those sorts of things that we do all the characteristics of that corrective structure stay in play. So, you've got an opportunity uh early on to identify the impulsive move, to get in here. Early on you identify you're in a corrective structure.

Yes, you may think that you're in an impulsive move here, which is quite legitimate. Uh you might take a losing trade. You might even get a winning trade in here depending like on this sort of pullback here.

There's a quite a bit of a move there on the lower time frames, but if you take that losing trade again, you can early on recognize that the the the characteristics of that corrective structure remain in place and you keep yourself safe from taking trending strategies all the way through this until what what happens here, we start to see early on this sort of shift in this change in momentum.

Um you can see that the moving averages start widening widening up. You see these strong green bars. And again, early on, even from as part of here where we start holding that eight moving average, we can see early on that the we're we're shifting to a impulsive move and you've got all of this to be able to capitalize on that.

And then what happens again, we pull back in. Early on in this structure, we can see that the moving averages come back together, they come more horizontal, mix of candles, start seeing wicks.

Again, early on in this structure, we can identify that we're moving into a corrective structure and therefore we need to shift our strategy. We need to trade more range-bound strategies and look for those types of and and and manage our trades accordingly from that. And again, all the way through here, really, you're seeing this little like mix and this oscillation of price.

You're not seeing these impulsive candles or anything like that. One other characteristic to look out for when you're looking at these, you can see that when you draw a box round the high and the low of the the price action, when you're in impulsive down move or an impulsive upward move, that the the boxes are rectangular and vertical, okay? So, visually, they are rectangular and vertical.

Whereas, when you're in these corrective structures, they're much more square-like or if they're rectangular like this one, they're more horizontal. So, just by drawing

[cough and clears throat]

Excuse me. A little box around the most recent price action, just visually you'll be able to tell whether you are in that corrective structure or whether you're in a a corrective or impulsive structure as well. So, hopefully this has given you a very basic way of being able to practice going into a chart and identifying where the dominant order flow is in the market.

Because if you can identify where the dominant order flow is in the market very quickly, you can then quite easily create a bias and therefore keep your trades on with that side of the market giving yourself high probability chances of winning trades.