When Wave 1 ends, we expect a counter-directional Wave 2 to emerge. Wave 2 is caused by sellers (buyers) who were not previously in the market—this differs from Wave 4, which results from profit-taking pressure by those already in positions (long liquidation or short covering).

The target zone for Wave 2 can be determined by: (1) Fibonacci ratios; (2) Internal wave count.

In most cases, Wave 2 typically retraces between 38% and 62% of Wave 1's magnitude. Approximately three-quarters of Wave 2s terminate within this zone; about one-sixth exceed 62% retracement. If Wave 2 retraces less than 38%, it usually indicates an irregular correction.

To reiterate, Wave 2 represents new selling pressure in an uptrend (or new buying in a downtrend) from traders who missed the initial entry and failed to recognize Wave 1 as the start of a new trend. These traders mistake Wave 1 for a corrective wave within the prior trend, hence establishing new short positions at Wave 1's peak. Consequently, Wave 2 behavior fundamentally differs from Wave 4's profit-taking dynamics. Profit-holding traders aren't eager to exit, while new participants act urgently upon spotting opportunities. Accurately assessing Wave 2's termination point is crucial because the maximum profit-per-unit-time occurs during Wave 3, where trends exhibit faster velocity and greater amplitude.