the hAnDbook of teChnICAL AnALySISAs seen in the Figure 5.7, a market may be both in trend and consolidation
modes at the same time, depending on the wave cycle being observed.
We may also define breakouts via the degree of the wave cycles. Figure 5.8 illus-
trates breakouts in terms of the wave degree being traded. Hence, we have breakouts
based on waves of lower, medium, and higher degrees. In other words, the break-
out level will depend on the wave degree being traded. Being aware of the wave
degree being traded will allow the trader to size the stoploss effectively, according to
the average wave amplitude and volatility associated with that particular wave de-
gree. Volatility at one wave degree may not manifest at a higher or lower wave degree.
significance of higher Wave Degree reversals
There is a reason why turning points of larger wave cycles (or trends) are more
significant than those of smaller wave cycles. It all has to do with wave‐degree con-
vergence. When a large wave cycle (or trend) reverses, all the wave cycles of lower
degrees reverse in sync with the larger wave cycle. It is at the point of reversal that all
subwaves of the largest wave reverse together. It must be noted that waves of higher
degrees need not reverse when waves of a lower degrees reverse. See Figure 5.9.
figure 5.7 Consolidation and Trend Action in Terms of Wave Cycles and Degrees.
figure 5.8 Breakouts in Terms of Wave Cycles and Degrees.