Support / Knowledge Emporium / Counting on the Waves
Counting on the Waves
A New Look on the Celebrated Trading Method
The Elliott Wave theory has been a major thing in trading for decades now and, undoubtedly, Mr. Ralph Nelson Elliott should be held in high esteem by all those who trade the markets these days. However, while some steadfast followers consider his theory to be a highly effective pattern recognition technique able to help predict market developments, others are prone to regard Elliott's creation as a commonly used methodology, a brilliantly created means of seeing the recent past of the market, rendering this past with stunning clarity. Who's right and who's wrong?
The Elliott approach construes
market actions as recurrent phases, comprised of two major moves:
a five-wave advance and a three- wave decline, customarily referred
to as the Impulse Wave and Corrective Wave.
According to the Elliott theory, the market phases are scalable and
the same market actions can constitute the same but larger or smaller
phases and be considered over time periods that differ in duration
significantly. By identifying the current position in the phase, it
is possible to predict the kind of market action that will follow.
This is made easier by the following interpretation rules for the
counting of the waves:
One of the sub-waves 1, 3, 5 of the Impulsive Wave is supposed to be an extended
wave. For a better understanding of the Corrective Wave phase, the
Elliott theory delineates the following types of sub-waves that can
make up the Corrective Wave: Zig-Zag, Flat, Irregular, Horizontal
Triangle, Double Three, Triple Three. This stringently ordered,
if a bit complicated in places, and revered by many theory seems to
provide an effective means of analyzing market developments and only
God knows what would happen if it worked completely as stated. Basically,
all you have to do is determine which of the itemized wave forms is
going to arise next. And here is where the pitfalls start. And God
forbid we call into question the accuracy of Mr. Ellliott's concept,
Fibonacci's Golden Ratio it is based on,
or the laws of the Universe the latter claims to explain. The problems
are a lot more trivial. How will you determine the starting point
for your count of the waves? Out of five people who will look at the
same chart two will most probably see the starting point differently.
Right from the outset, the ticket for your journey to success seems
to be hard to get hold of.
- Wave 2 should not end below the beginning of Wave 1;
- Wave 3 should not be the shortest wave among Wave 1, 3 and 5;
- Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree;
- Rule of Alternation: Wave 2 and 4 should unfurl in two different wave forms.
However, if you've been able to identify
the starting point correctly, you will very soon understand that identifying
waves as they are occurring is something altogether different from
identifying waves when they have already occurred. And this is the
second and biggest disadvantage of the Elliott theory. Unfortunately,
there are several more. Is there going to be the fifth wave? Will
the correction be flat or zigzag? Which of the waves will have the
extension? All these are questions Elliott's theory has difficulty
It is true that many experienced traders who have extensively dealt with the "bugs" the theory contains use the Elliott method as a predictive technique. However, all the above has caused many thinking traders to form a vision of the Elliott theory as of a methodology, rather than a predictive technique. In their opinion, this methodology has been extremely helpful in naming and identifying different states of the market: strong and week trends, complex and simple corrections. This can help gainfully use the other methods in your combination at the opportune time.
This view on the Elliott theory and the approach on which some of
the thinking traders base their use of Elliott waves seems to be quite
correct: the main value of the method is the possibility of
determining the phase the market is currently in. And this
is too valuable an addition to any thinking trader's arsenal to overlook