Wave 2
Wave 2 is the first corrective wave within an impulse sequence. It retraces a portion of Wave 1 but has one absolute rule: it can never retrace beyond Wave 1's starting point. Common retracement levels are 50%, 61.8%, and sometimes 78.6% of Wave 1. Wave 2 corrections tend to be sharp and fast, typically taking the form of zigzags or double zigzags. They feel terrible. The sentiment during Wave 2 is that the previous downtrend is resuming and Wave 1 was just a dead cat bounce. This is exactly why Wave 2 offers one of the best risk-to-reward entries in all of Elliott Wave trading. Your stop is the start of Wave 1, and your target is the entire Wave 3, which is usually the longest and most powerful wave. You spot Wave 2 endings by watching for the retracement to reach 50% to 61.8% of Wave 1, combined with momentum divergence and a clear three-wave corrective structure.
Bitcoin completes Wave 1 from $30,000 to $45,000. Wave 2 drops sharply over 10 days, falling to $35,700 (a 61.8% retracement of the $15,000 Wave 1 move). Fear dominates. Social media calls for $25,000. But the decline subdivides into a clear A-B-C zigzag on the 4-hour chart. RSI hits 30 and shows bullish divergence. A trader enters long at $36,000 with a stop at $29,900 (just below Wave 1's start), risking $6,100 per unit. If Wave 3 extends to 161.8% of Wave 1, the target is $60,000 or higher.