Chartered Market Technician (CMT) Practice Exam

In technical analysis, a corrective wave typically indicates a brief counter-trend movement. This concept is rooted in the Elliott Wave Theory, which posits that markets move in waves that consist of various patterns of trends and corrections. A corrective wave is seen as an adjustment or retracement in price that moves against the prevailing trend.

Corrective waves often occur after a strong trend (either upward or downward) and serve to provide a temporary pause or pullback before the original trend resumes. They may manifest as smaller price movements within a larger ongoing trend, suggesting that although there is some retracement, the overarching direction of the market remains intact.

Understanding that corrective waves are not necessarily indicative of a trend reversal is crucial, as their primary function is to provide space for price consolidation or minor adjustments before the dominant trend continues. This context is important in forming trading strategies, as a trader may interpret corrective waves as opportunities to enter trades in the direction of the existing trend once the corrective phase concludes.