What is a truncated Wave 5?

A truncated Wave 5 (also called a 'truncated fifth' or 'failure') is a Wave 5 that fails to exceed Wave 3's price extreme. In an uptrend, Wave 5's high is below Wave 3's high. Truncation signals exhaustion and typically precedes a sharp reversal.

Truncation occurs when Wave 5 lacks the momentum to push past Wave 3's price peak (in an uptrend) or trough (in a downtrend). The 5-wave structure is technically complete, but the final wave failed to make a new extreme. Truncation is a strong sentiment signal: the trend has exhausted itself, institutional buyers (in an uptrend) are no longer willing to push prices higher even with positive news, and a reversal is imminent. Truncations are most common after extended Wave 3s and at major market tops or bottoms. They're relatively rare — roughly 10-15% of completed 5-wave impulses — but the reversals that follow tend to be sharp because trapped late-entry traders need to exit quickly. Identifying a truncated Wave 5 in real time is difficult; it usually becomes clear only after the A-B-C correction has begun.

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• → Rules and Guidelines — the 3 absolute rules + 7 guidelines

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