Wave 5
Wave 5 is the final impulse wave in a motive sequence. It completes the five-wave trend and sets up the larger correction that follows. In terms of length, Wave 5 often equals Wave 1. When Wave 3 extends, this equality relationship becomes even more reliable. If Wave 3 did not extend, Wave 5 sometimes extends itself, reaching 161.8% of the distance from the start of Wave 1 to the end of Wave 3. The key characteristic of Wave 5 is weakening momentum. Volume is typically lower than in Wave 3. Momentum indicators like RSI and MACD almost always show divergence. Price makes a new high but the indicator does not. This is your warning sign. Wave 5 is where retail traders pile in with maximum confidence, right before the trend reverses. Smart traders use Wave 5 to scale out of positions and prepare for the corrective phase. The end of Wave 5 is not always obvious in real time, which is why momentum divergence is so valuable as a confirmation tool.
EUR/USD completes Wave 4 at 1.0850. Wave 5 rallies to 1.1050, covering 200 pips. Wave 1 was also 200 pips, confirming the wave equality guideline. RSI peaked at 78 during Wave 3 but only reaches 65 during Wave 5 even though price is higher. Volume on the rally is noticeably thinner. A trader watching this divergence begins scaling out of long positions near 1.1050 and sets a stop just above. The pair reverses sharply into an A-B-C correction.