Question of the Week: 5/29/2006

What is the best and safest approach to trade an impulse wave? Many books say "exit at end of wave 1, reenter at low of 2, exit at end of 3, reenter during wave 4, exit at end of 5."


This very important question was sent in by Afshin Pishdad of Ontario, Canada. It would be great if we could all accomplish what so many trading books on wave theory espouse. Unfortunately, in the real world, what they donít tell you (or they simply donít know) is that wave structure is ONLY clear during wave-1, wave-5, wave-c (in Flats), wave-e (in Triangles), wave-g (in NEoWave Diametrics) and wave-i (in NEoWave Symmetricals). In other words, during the first or last wave of most patterns. Even then, unless there is sufficient detail, certainty and confidence can be low. The closer to the center of a formation a market is, the greater the level of uncertainty experienced and the greater the number of potential outcomes.

Ironically, it is when a market is near the center of its development that most (due to confusion) seek out "advice" from experts - right at the time wave "experts" are most likely to be wrong. When near a major top or bottom (i.e, at the start or end of a trend), the public is usually convinced they know what is going to happen (wrongly so) and, as a result, have little interest in what analysts (wave or otherwise) have to say. That is exactly the time when wave analysts are most likely to be right, but at the same time ridiculed or ostracized for their opinions! What a sad state of affairs.

So, in answer to Afshinís question, the best and safest time to enter a market is in the reverse direction of a clear, completed 5-wave move, whether that "5-wave" move concludes wave-5 of a larger degree or wave-c of a larger degree. The next best time to enter is at the end of a 5-legged Contracting, Expanding or Neutral Triangle. Somewhat more dangerous and tricky is the end of a complex, corrective Double or Triple combination or the end of a NEoWave Diametric or Symmetrical pattern that does NOT contain an impulsive conclusion on the lower degree.

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