Wave 4 This is just a profit taking retracement. Some participants decide to exit and take profit, since the currency has shown solid growth and probably they have changed their assessment of the attractiveness of holding positions. Usually the 4th wave is weakest among all others. Because many trades wait to “buy at deep” again and step in with long positions. Many professionals decides to exit precisely at 4th wave, because public has tremendous enthusiasm to Buy, and they (public) provide excellent demand and liquidity at good prices to sell huge professional’s positions. It is not very important on FOREX, where liquidity is always high, but this is significant for the stock market. Now a couple of words are about second and 4th waves. They have a tendency to take one of two different forms – “flat” or “sideways” retracement or “sharp” retracement. They are always alternate between these two ways of retracement. Here is how this it looks like: Fourth Wave should not overlap with First wave! Other words – low of 4th wave should not be lower than the high of 1st wave in bull trend and high of 4th wave should not be higher, than low of 1st wave in bear trend Wave 5 This is a period of sick fascination of currency growth. But here is easier to imagine the psychology of 5th wave on some stock. If you see, how your grandma has read in some magazine about this stock and put her money in, and the Executive of this company tells almost every day on CNBC about huge long term perspectives, or he/she has become a Person of the year with “People” magazine or some other, numerous brokers, traders and investors start to coming up with a lot of reasons (sometimes curious) why this currency or stock is undervalued and has to be bought – you should know – it’s time to get out. This is the time, when stock/currency is strongly overpriced. Also during the 5th waves contrarians start to initiate short positions. That’s why very often 5th wave could be flat or has unstable shape – the move up happens but very irregular. This initial shorting later leads to ABC retracement pattern. Since 5th wave very often develops in Overbought (on bull trend) or Oversold (on bear trend), it falls in “Truncation”. This is a situation, when high of 5th wave can’t establish new high and remains lower than the high of third wave – look at the picture: All this explanation is absolutely applicable to a bear trend as well.