Establishing Investment Strategy and Reducing Risk

Wave interpretation rules and Fibonacci relationships together
are powerful tools for establishing investment strategies and
reducing risk exposure. Investors use them to help decide where
to get in, where to get out and at what point to give up on a
strategy. Thus, the Wave Principle lets you identify the highestprobability
direction for the market, plus adopt an optimum
position to take advantage of it all while protecting yourself
against lower-probability outcomes.
The lowest point on
the chart is the end of a fairly large-degree decline. Thus, the
investor would look for at least a three-wave move to the upside
at the same degree.
In this case, the market has moved up in five waves in about
two weeks, with a three-wave downward correction afterward, as
in the movement shown
Once wave 1 to the upside is complete, the investor can set
price targets for wave 2. In a given five-wave impulse sequence,
wave 2 most often retraces 62% of the preceding wave 1; next
most common are 38% or 50% retracements. These relationships
generate targets of approximately 5300, 5500 and 5400
for the bottom of wave 2, in order of probability.
So if prices drop substantially below the 62% retracement
point at about 5300, probability shifts away from the preferred
interpretation. And if prices fall all the way beyond the low just
under 5000, this development will violate the rule that second
waves may not retrace more than 100% of first waves. This will
require the investor to shift to an alternate interpretation, if he
or she has not already done so.
The investor can take advantage of these rules and
relationships in various ways. For example, a longer-term
investor might see an opportunity near 5000. He would look
to benefit from the entire expected upmove, ignoring interim
corrections. Also, knowing that wave 2 cannot more than fully
retrace wave 1, he could determine that his interpretation
would be wrong if the market were to dip below the low. He
could choose to limit his risk there. Or, because he knows that it
is unusual for wave 2 to significantly exceed a 62% retracement
of wave 1