Elliott Wave Theory: Is Elliott’s Theory a system in itself?
As many traders know, The Elliott wave Theory is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Elliott’s Theory was developed by Ralph Nelson Elliott and published in 1938 in the book The Wave Principle. The Theory states that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.
In Elliott’s Theory, market prices alternate between an impulsive, or motive phase, and a corrective phase on all time scales of the trend, as the illustration shows. Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. Motive waves always move with the trend, while corrective waves move against it.
We do understand the idea and we practice the idea every single day, we do over 4000 charts every month and we have seen that even when the Patterns happen because of the nature of the Market which comes with 2 sides, the bulls and bears which by definition is a fight between both of them. The reality is that most waivers practice the Theory looking for the 5 waves and 3 waves back and 90 % of the time they end up been wrong. We are not saying that Elliott’s Theory cannot be used, but by nature, the Theory is great after the fact and not enough to forecast the future. As Humans, we tend to live in a state of denial and taking the easier road always come by nature. I started Elliottwave–Forecast in 2005 and did the analysis on the basis of Elliott Wave Theory. I was always looking for 5 waves and trading those waves 4’s and 5’s like everyone else does. With the passage of time, I started opening my mind and understanding that the Theory is a way of communication instead of a way of forecasting. In simple words, the theory always is right after the fact but when the market is moving and structures are developing, there is always more than one possible path and sometimes quite a few paths are there and none of them would break the rules of Elliott wave theory. I cannot be a blind follower, I need to think by myself, otherwise, I won’t be me and lose my identity.
