Elliott Wave The problems faced
Trading Elliott Wave – Enter the real world
Please understand that the comments in this web site are only a personal observation from my own experience, but it is one that appears to reflect many Elliott wave analysts I have met during my 30 years involved in the markets. The normal sequence of events goes something like this…
Firstly, the budding Elliott wave analyst hears about Elliott waves on some chat room or from another trader, and then goes and purchases an Elliott wave book or trading course. They then spend months carefully studying all of the rules and guidelines with the aim of becoming fluent in Elliott wave analysis. They then try to apply the rules and guidelines they have learnt to real and live market examples, normally with limited success. You can always spot a new Elliott wave analyst because they always have the most current bar ending some sort of complicated wave structure, with labels of varying degree all over their chart. They then make a forecast that must be correct because everything is perfect and all the rules have been obeyed on their chart.
However, the market usually goes the other way, resulting in a trading loss. They usually try this on a number of charts over a few weeks or months, with most of the charts moving in exactly the opposite direction to anticipated. Sometimes the Elliott student will have one great success, and call the exact day of a market turn, which normally makes them deny or carefully forget more of the not-so-good recent calls on other markets. But usually, at some point, the student admits that most of their calls are not working out as anticipated.
I have seen this all too often over the last 30 years – Basically, no matter now perfect the current wave count seems, it very often break down at some point in the future. As such the current forecast you have does not work out as anticipated.
So why should the theory break down so often? From my own experience I noticed that Markets go through Cycles, they have periods of clarity, where the pattern is clear and can be used, then they also have periods of uncertainty, when the pattern is unclear. I call this the “The Cyclical Nature of Trading”. The only practical way round this is to accept that Elliott wave analysis only works about 50% of the time. In other words, an easy to recognise and obvious wave count only exists on ½ the charts you look at or will only work about ½ the time while you are looking at one market.
So is there an answer ? And more importantly, can Elliott Wave (with all its shortfalls) be used as a successful trading approach ? I am glad to say that the answer is yes, please see the next section.