Retrace waves in Elliott Wave Theory are essential components of the market's cyclical nature, representing the corrective phases that counteract the primary trend. Developed by Ralph Nelson Elliott in the 1930s, this theory posits that financial markets move in predictable patterns, characterized by five-wave impulses and three-wave corrections. Retrace waves, or corrective waves, typically follow a five-wave impulse sequence and are labeled as waves A, B, and C.

Wave A marks the initial counter-trend movement, often indicating the end of the preceding impulse. Wave B is a temporary resumption of the original trend, generally weaker and shorter than the impulse waves, and is often seen as a "false" continuation by less experienced traders. Wave C completes the corrective phase, usually mirroring wave A in length and strength, thus finalizing the retracement.

The purpose of these retrace waves is to adjust the market’s overbought or oversold conditions created by the impulsive waves. They allow the market to consolidate and prepare for the next impulse. Corrective waves are typically harder to predict and can vary in complexity, taking forms such as zigzags, flats, and triangles. Understanding retrace waves is crucial for traders using Elliott Wave Theory, as it aids in identifying potential entry and exit points during market corrections.