Elliot wave theory has a huge and devoted following and is being described as advanced technical analysis and the key to un locking market behavior and predicting the future.
Let’s look at it in more detail and why Elliot Himself could not make money from the theory.
The theory was named after Elliott himself, who concluded in his book “nature’s law” something all traders would love to know.
He concluded that:
The movement of financial markets could be predicted by observing, and identifying a repetitive pattern of waves.
Of course there are repetitive patterns in nature and we all know that, but how do we use them to trade?
We know that at some time in the future, we will see a sunny day when we go outside, the REAL question is when exactly?
So, markets are cyclical, but that doesn’t mean you can predict them in advance and that means in specific time frames.
What we want from an investment theory, is the EXACT timing of a specific event.
Elliott wave theory is put forward as objective investment theory but this is a contradiction in terms as there is nothing objective about it.
The whole theory relies on the subjectivity of the person using it!
You need to look at peaks and troughs, (various time frames) and then make a subjective judgment on where prices are going to go next.
That’s up to you.
Elliot Wave Theory
Is according to Elliot based on rhythms found throughout nature and these of course apply to financial markets to.
He then makes the observation that:
The financial market moves up in a series of five waves and down in a series of three waves.
Elliott wave principle however neglects the most important part we all want to know:
The time requirements for a cycle to complete.
In Elliot wave theory there is no time requirement.
The subjectivity is so great in Elliott wave that a thousand different people will all come to different conclusions, so this can hardly be called an objective theory as it’s all subjective.
Like most of the far out investment theories, everything is explainable in hindsight, however we don’t trade in hindsight - we have to predict what will happen next in real time.
In conclusion: Elliott says that you are able to predict the market with his theory- but then gives you no objective way of doing it.
Who uses Elliott Wave?
1. Investors who want an easy way to make money, and are taken in by great advertising copy – well it is a good story!
2. The far out investment crowd attracted to the mysticism of objective laws in nature and the markets.
Predictive and subjectivity are contradictory!
The Elliott wave theory is a predictive theory which predicts nothing at all and leaves everything to subjective analysis.
If Elliott had worked out a predictive theory then he could have be kind enough to give us an objective way to make money.
If all investors could predict the market in advance, we would all know what was going to happen - and there would actually be no market at all, as we have said previously.
Did Elliot leave a track record of stunning gains?
Of course he didn’t - in fact he died a pauper, so he obviously couldn’t use his own theory like the rest of the people who try it
You can predict one certainty with Elliot Wave
The only thing you can predict with certainty with Elliot wave theory, is that you will get wiped out in the markets.
Predictive theories are hard when you actually have to decide market direction with no objective help!
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