Some view on Elliot waves
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Long back I decided to write a blog for one main reason – to be able to express myself without inhibition. To be able to talk to myself on range of subjects that interests me infinitely. There were many other routes of expression like forums and articles. But in those forms my expressions are generally restricted to the social norms, climate and objective set by the forum. I may not be able to contradict/ express something that many may find sacrilegious.
In this post I deal with one of the methods of trading that I consider is irrelevant in its original structure. Hence, this is just a note from myself to myself on something that I consider irrelevant – Elliot Waves.
An Elliot wave theory is a method of technical analysis that evokes strong emotions from the followers and detractors. To clarify I am neither. Please note I do not say method is irrelevant but just saying it might be irrelevant in its original form. I use Elliot wave in many ways, short-term trading (a popular application of the method) not being one of them.
Fortunately, Elliot waves were one of the first methods of technical analysis that I was initiated into. And hence I have had fascination and have studied it for a long time. I have observed a lot of experts of Elliot waves for many years.
My disenchantment with Elliot came when experts I was watching and learning from were consistently proven wrong by the markets. Their counts were full of recounts. No attempt was made to think, if the presumptions were wrong. Every time there was a long theory but without any tradable suggestions. Since then I have used Elliot waves in my own distinct way, as an important substantiation for long-term trends & complimenting other studies.
There are some reasons that I think Elliot in its pure form has outlived its existence.
One of the most important points that classical technical analysts use to counter is also one of the most fundamental - human behavior. The argument is that behaviors of human beings do not change, and so a theory based on behavior is never out of date.
With any method of analysis, Elliot or others, we have no way of directly measuring the behavior of people. We can only measure the emotions, sentiments and attitudes on the impact it is having on some quantifiable element. For example, astronomers do not have any direct evidence of existence of Black matter. But its existence is proved based on the impact it has on the nearby stars. Similarly we cannot represent behavior but we can suggest it using the factors of price, volume and open-interest.
To reiterate we measure the impact based on its assumed impact on our measuring compass.
Elliot waves were first theorized in late 1910’s and early 1920’s, using the data starting from 1900s. To understand why original theory has lost its relevance, we have to understand that theory was developed in early 20th century when the social and technological atmosphere was vastly different from the today’s.
The communication technology today is extremely advanced compared to the time of theories’ origins. The travel, exchange of ideas, ease of trading, leverage, financial instruments and large number of traders in the market today are vastly different from the day when Elliot waves were first envisioned.
It is very simplistic to say the factors affecting the people’s trading and its impact on the prices have changed. It is unlikely overall behavior will change but will certainly impact our measurements.
My basis of the argument against Elliot waves is based on the above advancements – technological and financial. With the changing times, the original wave theory needs some modifications in thought and execution.
:) Falkor
----------------------------------------------------------------------------------------------------
Long back I decided to write a blog for one main reason – to be able to express myself without inhibition. To be able to talk to myself on range of subjects that interests me infinitely. There were many other routes of expression like forums and articles. But in those forms my expressions are generally restricted to the social norms, climate and objective set by the forum. I may not be able to contradict/ express something that many may find sacrilegious.
In this post I deal with one of the methods of trading that I consider is irrelevant in its original structure. Hence, this is just a note from myself to myself on something that I consider irrelevant – Elliot Waves.
An Elliot wave theory is a method of technical analysis that evokes strong emotions from the followers and detractors. To clarify I am neither. Please note I do not say method is irrelevant but just saying it might be irrelevant in its original form. I use Elliot wave in many ways, short-term trading (a popular application of the method) not being one of them.
Fortunately, Elliot waves were one of the first methods of technical analysis that I was initiated into. And hence I have had fascination and have studied it for a long time. I have observed a lot of experts of Elliot waves for many years.
My disenchantment with Elliot came when experts I was watching and learning from were consistently proven wrong by the markets. Their counts were full of recounts. No attempt was made to think, if the presumptions were wrong. Every time there was a long theory but without any tradable suggestions. Since then I have used Elliot waves in my own distinct way, as an important substantiation for long-term trends & complimenting other studies.
There are some reasons that I think Elliot in its pure form has outlived its existence.
One of the most important points that classical technical analysts use to counter is also one of the most fundamental - human behavior. The argument is that behaviors of human beings do not change, and so a theory based on behavior is never out of date.
With any method of analysis, Elliot or others, we have no way of directly measuring the behavior of people. We can only measure the emotions, sentiments and attitudes on the impact it is having on some quantifiable element. For example, astronomers do not have any direct evidence of existence of Black matter. But its existence is proved based on the impact it has on the nearby stars. Similarly we cannot represent behavior but we can suggest it using the factors of price, volume and open-interest.
To reiterate we measure the impact based on its assumed impact on our measuring compass.
Elliot waves were first theorized in late 1910’s and early 1920’s, using the data starting from 1900s. To understand why original theory has lost its relevance, we have to understand that theory was developed in early 20th century when the social and technological atmosphere was vastly different from the today’s.
The communication technology today is extremely advanced compared to the time of theories’ origins. The travel, exchange of ideas, ease of trading, leverage, financial instruments and large number of traders in the market today are vastly different from the day when Elliot waves were first envisioned.
It is very simplistic to say the factors affecting the people’s trading and its impact on the prices have changed. It is unlikely overall behavior will change but will certainly impact our measurements.
My basis of the argument against Elliot waves is based on the above advancements – technological and financial. With the changing times, the original wave theory needs some modifications in thought and execution.
:) Falkor
I have been thinking about Elliot Wave theory since the early 80's when I was a stock broker in Denver. Back then, the Dow was at 2-3,000, and Elliot Wave theorists were predicting 10,000. Looking back from that time, it seems they were right.
ReplyDeleteI was extremely interested to read of your opinion and experience with this theory.
Madame Monet
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