The underlying premise of Elliott Wave theory is that human behavior—as manifested in the movement of the stock market—can be modeled as a series of discrete patterns that recur predictably. This conclusion arises from a mistaken analogy between stock price movements and other phenomena found in nature. For centuries, people noticed that there were predictable patterns in snail shells, planetary orbits, ocean tides, and many other processes or objects. Often, these patterns were so consistent that they could be mapped to mathematical functions with a high degree of accuracy. Crucially, it was not necessary to understand why a particular mathematical function was able to predict a natural pattern. In other words, the underlying inputs (causal variables) of the pattern could remain unknown for centuries even though the mathematical model continued to forecast the pattern accurately. As an example, people were able to predict the movements of celestial bodies long before they had identified and understood the main underlying input (gravity) responsible for the model.

If you want to understand why Elliott Wave theory is flawed, it is important to distinguish between two very different categories of knowledge (and/or ignorance) about an underlying input. The first, which I will call the “Input Identity” or “Input Existence”, is simply the identification that the input exists at all. The second, which I call the “Input Degree” is the quantitative (or at least, relatively ordinal qualitative) value for the underlying input once its existence/identity has already been determined.

Input Existence and Input Degree are two very different things. To illustrate this idea using our example of celestial motion, early astronomers had neither (1) identified that a force yet to be called “gravity” existed at all (i.e. they lacked knowledge of the Input Existence), nor had they (2) the means to assign any value (Input Degree) to this input, regardless of whether they had yet identified its existence or not. Thus, it was an “unknown unknown”.

Once both the gravitational force and the tools for calculating it were discovered, the patterns of celestial bodies suddenly made more sense. As mentioned above, the history of science is full of such examples of "ex-post-discoveries" of underlying inputs that retroactively explained empirically accurate (but theretofore mysterious) mathematical models of natural patterns. What’s important to note here is that the explanatory variables for these patterns were most often (1) relatively few in number (2) not considered to be exhaustive and/or capable of making the mathematical model perfect. In the case of the movements of celestial bodies, we know that the basic gravitational calculation of masses and distances won’t be enough to predict a planet’s movement with 100% accuracy, since there are relativistic and other effects at play as well (including even changes in mass due to atmospheric dissipation, etc.). But what’s important is that the errors are small—in other words, our knowledge of the Input Existence and Input Degree for celestial motion is robust enough to facilitate launching probes to other planets.

To quickly recapitulate: (1) an apparent pattern in nature is observed, (2) a mathematical model is developed which robustly expresses the pattern and has predictive power, (3) the mysterious underlying causal inputs of the natural phenomenon are finally discovered/identified, (4) a means of properly calculating the values of the underlying inputs is finally discovered/identified, and (5) the pattern is now robustly (though perhaps not 100%) understood.

This brings us to the fundamental error of Elliott Wave theory. Looking at a stock index chart, we see an apparent series of loosely identifiable patterns, some of which seem to repeat sporadically. We then ask ourselves if it is possible that these patterns can be modeled mathematically in the same way that other natural phenomena have been. For this to be true, we would have to first (1) identify the main underlying inputs to the model, and (2) assign such inputs their respective degrees of value. Even though we might miss a few inputs, our model should still be robust enough if we catch the main ones.

So, is it possible? The answer is no.

We can state the reason as follows: Stock prices do not move as a result of unknown unknowns that have yet to be BOTH identified and THEN valued. We’re not looking for something mysterious and new--we in fact ALREADY KNOW the handful of main Input Identities that robustly explain stock price movements. We also already know that these inputs (often correlated) are themselves dependent on countless other, secondary inputs that we cannot accurately value, even if we occasionally can estimate some of them correctly. And here is our theoretical lynchpin:

*We ALREADY KNOW, a priori, that no single theory or mathematical model can accurately predict the values (Input Degrees) of certain of these secondary inputs*.

Or more verbosely and accurately,

*we already know that no single theory or mathematical model can accurately predict the values of the members in any arbitrary subset of these secondary inputs, as long as such arbitrary subset contains only members that are themselves substantially independent of each other.*For the purpose of our analysis, we will focus on subsets of variables consisting of only two members (i.e. pairs of secondary inputs).

To clarify the above more concretely, let’s start by looking at an extremely important underlying “main input” that should enter into any mathematical model purported to predict the price movement of the S&P 500: next year’s earnings. Although a massively important input, the exact value of “next year’s earnings” would not alone allow you to predict the price direction of the stock market, although knowing this input’s exact value would give you a major advantage and probably make any model much more accurate. If you were to couple this input with a precise knowledge of the U.S. dollar’s value relative to other currencies at the end of next year, it would make your model even more robust. There are probably just a dozen or less such “most major” inputs that, when put together, would produce a mathematical model that was strikingly predictive if the actual (quantitative or ordinal qualitative) values of such inputs were known with certainty. The fact that many of these inputs (economic, behavioral, social, etc.) are correlated to various degrees does not change matters. Nor does it matter that these dozen inputs could be “swapped” with a dozen other similar inputs to yield a similar result (i.e. tell me next year’s Nasdaq earnings instead, and my S&P stock price model will still work robustly, due to correlation). As stated above, what’s important is that these dozen (or so) interchangeable “main inputs”, or “input categories”, are themselves functions of countless (effectively billions) of other, secondary inputs that no one mathematical model (including EWT) can predict.

But how can we claim that we know this a priori? Firstly, we can show (in practice actually, not just in theory) that within the set of billions of secondary inputs, there are countless pairs of any two such inputs that cannot be expressed as predictive functions of each other no matter how much we try. Usually, basic common sense alone will identify such pairs of inputs (for example, “average summer temperature in North America” and “probability that the Chinese minister of finance unexpectedly dies” are two inputs that have miniscule mathematical interdependence, while both influence the S&P 500 to at least some very small degree). By definition, if the two secondary inputs making up any particular pair showed a strong enough degree of correlation (or indeed any strong enough mathematical relationship), then either one of the inputs would become redundant. This is because that particular input would not add much explanatory power to a mathematical model that already contains the other input in the pair. But we find instead (in practice) that when we do properly estimate secondary inputs individually, our overall predictions meaningfully improve in increments. In addition to this, we also know that the values of our countless “non-interdependent secondary inputs” are not totally random. If they were totally random, then we would have to treat them as errors (or potentially disregard them) within our main mathematical model. Note that I use the word “totally” because all of these inputs reflect at least some degree of effective randomness (even prior to being deconstructed down to the physical level of quanta, if that were even possible). Now—how do we know that these secondary inputs are not totally random? Because IT IS POSSIBLE to sometimes predict, very accurately, the values of some of these inputs using direct, observational methods—i.e. imperfect but reliable, fundamental analysis. For example, a diligent analyst rolls up his sleeves, pours over tons of data, and then accurately (or at least robustly) predicts next year’s corn harvest. At the same time, he also correctly predicts some changes to certain of next year’s tax rates, after reading 21 articles on the subject. He looks at the data historically, and finds that the corn harvests and the tax rates show no meaningful correlation or other mathematical relationship to each other.

He plugs both of these values into separate areas of a larger mathematical model that he uses to predict agricultural sector profits for next year. He then plugs this figure into an even bigger model and uses it to predict the value of the S&P 500 slightly more accurately than he would have otherwise.

Note that our analyst has arrived at a value for each input “deterministically” from even more basic constituent data, and in total mathematical isolation from the other input in the pair. Now for Elliott Wave theory to make any sense, one would have to take the absurd position that these two inputs in fact are indeed mathematically related at an even higher functional level (already known to the EWT practioner) than what the analyst understands. Perhaps you might refer to it as holistic or biblical? With all due respect, I believe that it would be the Elliott Wave theoretician who should have the responsibility of proving this "already known" mathematical interdependence to the analyst, and not the other way around. It would need to be proven for each and every pair (or at least a heck of a lot of them) for the main mathematical model to be valid.

What our analyst has done is use two secondary inputs, each of which somehow fulfills the seemingly “miraculous” criteria of (1) being individually predictable by fundamental analysis of more basic data, (2) not mathematically interdependent with its counterpart, and (3) partially explanatory for the future value of the market. There is nothing odd about this unless you look at the problem with deterministic preconceptions. Now—the fact that ALL THREE of these criteria have been fulfilled proves that the two inputs cannot both be variables within any deterministic mathematical function whose final output value (the market) we already know.

*If they were, you would be able to use such a mathematical function in reverse to robustly predict either of the inputs themselves in terms of the other.*Try using Elliott Waves to predict next year’s tax rates in terms of corn harvests, and you’ll see what I mean. At the same time, nobody could argue that tax rates have absolutely no influence on the S&P 500. You could repeat this argument using thousands of other examples. Every time, you would find that no “global” mathematical function (such as Elliott Wave theory) would be able to robustly predict your independent variables in reverse. By their absolute (rather than just marginal) nature, these thousands of predictive errors do not “cancel out” each other in the aggregate to yield a convergent result. Elliott Wave theory just can’t work, by definition.

At this point in the argument, an Elliott Wave adherent may cry foul. How could you use Elliott Waves “in reverse” to predict the value of just one variable in a massive function, when you don’t know all of the other variables (and their relative influences) within the function as well? My answer to this question is that you can’t have it both ways. If you accept the idea that fundamental analysis works at all (which I do), then that means that you also accept the idea that sufficiently robust (though hardly perfect) mathematical models of stock index movements can be constructed using values determined by rigorous, research-based estimates of future inputs (otherwise there would be no point to fundamental analysis). Now take your pick from any of these fundamental models that you care to choose. One by one, strip away the rigorously, independently determined value of each variable and replace it with the value (of that same specific variable) implied by plugging in the Elliott Wave prediction for the final output result (i.e. the future value of the stock market) while keeping the other variables the same. Soon, the model will begin to spit out nonsensical retro-predictions of crop harvests, tax rates, Alt-A mortgage defaults, or any other variable you care to name that might legitimately contribute to stock market movements. I bring this up because many Elliott Wave adherents claim to jointly use fundamental analysis, as if the two methods were complementary to each other. Ironically, they are in conflict. According to the logic behind the above refutation of Elliott Wave theory, every input variable correctly determined by fundamental analysis constitutes yet another reason why the remaining, undetermined input variables are not part of a deterministic mathematical function.

As you can see, the relationships of underlying inputs to stock values are totally different from the relationships of underlying causes to natural patterns that intrigued R.N. Elliott. When 19th century chemists could not understand why the elements of the periodic table displayed predictable, recurring patterns, it was the concept of electrons/orbitals that finally explained it all (just as gravity did for astronomers). For stock traders, there is no analogy—no all-encompassing force, particle, or wave that will one day be identified, valued and then plugged into an equation to predict the future. Rather, there are dozens of major factors that have ALREADY BEEN IDENTIFIED, yet whose values are known to be unpredictable in the aggregate—even if we can occasionally predict some of them individually by rigorous analysis of their constituent elements.

Proponents of Elliott Wave methods are likely to contend that my theoretical arguments are not relevant if the EW theory yields practical trading results. I will not dwell on the many arguments against the notion that an individual trader’s success necessarily proves the perpetual validity of the underlying method that he/she uses. But I will point out that it’s impossible to either prove or disprove the Elliott Wave theory’s validity by reference to its practical results. For this praxeological reason, a purely theoretical analysis is obligatory.

Finally, I should point out that, in practice, most Elliott Wave practitioners admit that their system is only meant to be a “general guide” with many possible outcomes (i.e. additional randomness and variability is introduced). That is, there is an “ideal” wave pattern according to the theory, but in practice there can be deviations from this pattern. Nothing about this admission refutes the above arguments, nor does it strengthen the underlying predictive power of Elliott Waves.

-Orvin Five

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This essay puts into words what I've always thought about EWT but couldn't really express like that. Congratulations.

ReplyDeleteHi,

ReplyDeleteThe arguements appears logical,its would be valid,if posted 20 years back then.

However,with the advances in Quantum Science, Dr Bill Williams and his associates, have proven with use of fractal studies(one the main tools for Quantum Science) that Elliot Waves have been proven true Check it!

Satni

Quantum science and fractal mathematics have no connection to the underlying argument of why Elliott Waves are not predictive tools. It is not a matter of debate that Elliott Wave terminology can be used to describe prior movements (but not future ones) using analogies to fractal mathematics and other sciences. I have even seen baseball used (e.g. one analyst speculated: "We might be in the 6th inning of this bear market"). But in reality he wasn't sure how many more innings were left. These are descriptive, rather than predictive tools. What teachers of Elliott Wave theory often do is try to convince students that their special descriptions of prior events (by assigning wave labels retroactively) imply predictions of future events. This is wrong.

ReplyDeleteIf you believe otherwise, you are welcome to post a description of the actual logic underlying your claim about quantum mechanics and fractal mathematics.

-Orvin Five

Hi Orvin Five

ReplyDeleteWould you do yourself a favor, Go Read Chaos Trading book by Bill Williams. Get the comments

by Elliott Wave and Quantum Science.

Bye now

Satni

Please post the essential theses of the book that contradict the Fundamental Error of Elliott Wave Theory.

ReplyDeleteIf these theses are compelling, I will read the book.

Mr. Five,

ReplyDeleteI am undecided about EW, as I have been looking at it for only 6 months.

One thing stands out in your rigorous essay to me that may be relevent.

You seem to be looking at mkt price action "mechanistically", in the same way one might use Newtonian physics to deduce the path a physical object might take as it is impacted upon by various other physical influences. But the gist of EW is that mkt price action is primarly a result of cycles in mass human psychology. It isn't an attempt to account for mkt action in a mechanistic way, where the mkt perfectly and accurately discounts all the tangible fundamentals that impact it. It obviously does not. It's about as rational as a herd of cattle.

Rather, the moods in the public swing from fear to optimism and back in cyclic manners. EW is attempt to account for and anticipate those cycles in mood.

Thanks for your comments. I intend to produce another essay that will more thoroughly address the topic you have raised. Note that I have already mentioned “behavioral” secondary inputs in The Fundamental Error of Elliott Wave Theory. To summarize--it is indeed necessary to incorporate human psychology among the “fundamental factors” that must be taken into account when forecasting stock movements. However, this is far different from pre-supposing that there is a perpetually valid behavioral model that has already been identified and that “already knows” the future behavioral reactions of market participants even to fundamental factors/events that have yet to ever occur (putting aside the fact that so many of these fundamental factors are either [1] random, or else [2] independently predictable [robustly] by fundamental analysis, but not mathematically inter-related in a manner that would allow them to be implicitly predicted by any one model). On top of this fallacy is the assumption that an “expert” can look at a stock index chart and (1) “isolate” the PAST influence of the behavioral model from all of the other, “non-behavioral” secondary inputs/influences that (already) caused prices to move to where they are, and then (2) somehow “pre-isolate” the FUTURE effects of this model from all of the future, “non-behavioral” influences so as to actually make a concrete forecast of the future direction of the market. I will try to find the time to develop this idea more thoroughly in a sequel to the Fundamental Error of Elliott Wave Theory.

ReplyDeleteThe behavior of the stockmarket depends on the knowledge traders have of it.

ReplyDeleteTraders ARE the stockmarket.

Simply said, as soon as there is an "valid" model available, it will become "invalid" immediately because all traders will act according to the valid model (we all want to become rich, don't we?). And by doing so, the behavior of the stockmarket changes, making the valid model invalid.

There currently is no mathematical technique that is suited for modelling the stockmarket.

EWT, or any technique that Technical Analysts use, or chaos theory (non-linear diff equations)for that matter are useless in this respect.

Thanks for your comments. Informally and practically, I agree with you that technical analysis is useless. But I should point out that your specific argument (i.e. any “valid” model becomes instantly invalidated as all traders follow it) is not enough to logically disprove technical analysis. This is necessarily true because not all traders are trading at the same time or trading in the same way. This must mean that at any given time “t”, only some percentage of traders are ever going to be aware of and therefore acting on any particular pattern. The salesmen of EWT and other Technical Analysis tools will therefore tell you: “All patterns are not created equal---only a small group of elite market technicians (such as ourselves) are able to see through all the noise. The herd will never follow our pattern recognition because it is too complicated/sophisticated for them.” Your argument against technical analysis based on patterns instantly being invalidated is susceptible to the above attack because the statement “Traders ARE the market” is too abortive—it doesn’t recognize the complete chain of causes and effects. What I mean is that traders don’t make decisions in a vacuum (and certainly not all of them base their decisions on technical factors only). Instead, they act as emotional/intellectual filters through which billions of outside factors influence stock prices. What I have demonstrated in The Fundamental Error of Elliott Wave Theory is that it is impossible to find a model that (1) incorporates these mathematically uncorrelated outside factors simultaneously and (2) somehow is able to filter out the influence(s) of these factors from a perpetually valid (alleged) behavioral model both in the past and FUTURE, as EWT theorists claim about their wave counting. Again—I agree with you about technical analysis in practice, though.

ReplyDeleteThank you for this post. I think you've done a good job of criticising the naive form of EWT. More deeply, I think you're missing the real points:

ReplyDelete1. EWT has quite devastating criticisms of other models, most particularly any model based upon fundamental valuations.

2. EWT is not a strong theory in the classical sense of the word theory. It's more of a philosophy or aesthetic sensibility. At any time t, different people using the same "theory" can have different interpretations of the past and also contrary expectations of future price action.

3. The slippery part of (2) is caused by the infinite number of different possible ratios in an infinite number series.

On the good side, an EWT purist is able to ignore the reams of seemingly more rigorous but practically useless blather that clogs the neurons of other types of analysis. The only reason an EWT user would look at these is to choose between two or more possible EWT interpretations.

EWT also takes a very long view of data series. The recent debacle in the markets was caused by the failure of other analysts to do the same, and worse, to eliminate outlying data points.

So... finally, all EWT really does is give a trader the guts to make a trade with a firm idea of when they'll cut their loss or take their profit. Even if the interpetation is totally random, the mental conviction to cut the loss short and let the profit run; and, to eventually take the profit is why this technique works a lot better than a fundamentalist who will buy the "cheap" stock at a 9 P/E and then double down on it a a 6 P/E only to see it go to a 5 P/E.

Orvin...brilliant read...well written. I've been trading the market for about 4 1/2 years with all the ups and downs trying to find the "Holy Grail" for trading along with buying tons of books on techinical analysis etc etc etc. Found EW a few months ago and jumped on that band wagon for awhile and while waiting for the BIG WAVE C down...missed most of this recent Rally. So EW does not work in my opinion. But what caught my attention in one of your posts was a statement you made:.."Pattern Recognition.." Would you mind explaining that? Thanks. Tom in NC

ReplyDeleteOrin - you leave a gaping hole in your argument up-front by observing that early astromers built empirical models of how celestial bodies "act" without any knowledge of the underlying independant variables. OK, so ralph elliott and bob prechter have constructed an emprical "model" of stock market behavior while lacking any insight into the independant variables. this is no different than the early astronomers. what's more, prechter's assertion is that markets do not "react" to earnings or whatever, rather they foretell earnings because they reflect underlying mood which in turn drives economic activity.

ReplyDeletei think the stronger case to make against elliot is that it is not terribly useful or predictive, i.e. the model construct is empirically sound but you'll be wrong as often as right in using it to predict

Yes, it is possible. Gimme a break. Science is always knocking down walls like the one you propose is there for human behavior.

ReplyDeleteMy thinking is that one can consider human behavior in terms of how charts wave in overlapping logarithmic (or other similar) curves from a high from important news to a low from the selloff. Just apply the chart to each object in space; that is, one's reaction to that object is chartable, and you have human behavior. People gather their idea of what that object is about, that is, their own reaction to it and any concepts that, Venn Diagram-like, intersect the object, involve the object and thus one's reaction to the object, and store the object (often as a single cell, such as a famous person) in their brain to use when needed.

Elliott wave theory is wrong because it tries to standardize things too simply, with counting and other highly subjective approaches.

ha-pattern

one question i NEVER seem to find answers to in all videos and articles i've read about the Elliot wave theory is... HOW DO I IDENTIFY THE ORIGIN OF THE WAVES??? I mean... how do i draw or count the waves? where do i start from? how do i know where to start from? i've seen several examples on charts but no one ever seems to explain why they chose theirs points as the origin of the 1st wave.

ReplyDeleteSo could someone please explain this to me? i know quite a bit about the Elliot wave theory now, but all that knowledge is USELESS cos i still can't apply anything i've learned.

so a little help PLEASE

You are completely wrong

ReplyDeleteRe. Pod's comment:

ReplyDelete"OK, so ralph elliott and bob prechter have constructed an emprical "model" of stock market behavior while lacking any insight into the independant variables.."

The whole point of the Fundamental Error of Elliott Wave Theory is that WE ALREADY HAVE an insight into the major "independent variables" (the most major two being future earnings and the future relative value of the currency in which those earnings will be denominated)---this is what makes the stock market different from astronomy and other sciences. The "gaping hole" you've identified is actually the main point of the essay, so please reread.

I learned the variability of EWT the hard way by taking a bearish blog as being fairly accurate and trading accordingly. However, another EWT site that I briefly subscribed too indicated that their software algorithms that follow EW rules would produce 49 different counts. Which one is right? Who knows. I now look at EW counts that currently conform to my trend model to only determine what my potential risk/reward is for a particular trade.

ReplyDeleteThanks for your post. The Fundamental Error of Elliot Wave Theory is meant to demonstrate that the most essential assumption of EWT ("stock patterns are analogous to natural patterns") is flawed. The fact that a person can introduce errors of any arbitrary size (i.e. variability in both wave count and size) does nothing to refute this underlying logical flaw of EWT. It is as if one were to defend astrology by pointing out that several different astrologers have different predictions. It does not matter how many different branches one wants to add to a tree, if the underlying trunk does not stand because it isn't planted firmly in the ground...

ReplyDeleteThe only form of fundamentals that I believe truly works is "inside information," and that's illegal :)

ReplyDeleteEarnings and stock price are not directly correlated, aside from noise in the signal momentarily generated by "news."

I write algos at the one-minute scale and work with people who write algos at the sub-one-minute scale. From the results I can say that TA can work without a doubt. However, no TA will work *forever*.

I wonder if your thoughts regarding EWT could be supported or detracted from with a study wherein a closed set of people are given a commodity to trade while simultaneously recording their 'social mood' using some sort of standarized model. Prechter ought to fund such a study.

-s

Orin, The Elliott Wave Theory has passed the test of time and the test of money. More people are willing to pay good money every month for the predictions of 20 editors on all of the world's markets. For 32 years they have been predicting markets and now they are the largest service.

ReplyDeleteNot always right, of course, but people trading real money on every market will pay for the next forecast. Prechtor is not telling anyone they will get rich quick, so the endless supply of fools argument is out.

The stock market follows the mathematics of many other natural phenomena. The math of stock market crashes similar the the math of earthquakes, epileptic seizures, hydrodynamic turbulence, acoustics of material failure etc. Dr. Sornette has predicted several crashes.

Dr. Eugene Stanley studied 200 million market transactions and found scale independent patterns to eight degrees of trend and rare events happening at all degrees of trend that correspond to power law distributions and phase transitions that are observed in many natural systems.

So check out these studies, read some more Elliott Wave material and write a new article.

http://docs.google.com/viewer?a=v&q=cache:DWsTpUgGBagJ:web.sg.ethz.ch/wps/pdf/CCSS-09-005.pdf+Black+Swans+Dragons+kings+Prediction+of+Crises+and+Risk+Management&hl=en&pid=bl&srcid=ADGEESis-_EIHl-cIwX5RRKCKKbju-2DI3_VUZ-PukL19oMD-bJhOtGNDBc-ZOlWjnKCiftHo9Z8wrU7-E7MN9rSxyX0Ilo_WR3mFYBCE7rLouZRd0Qwjr0xm2V-TAF6qOd4FQAaPIbt&sig=AHIEtbQlotOnndLIsBn3gAVeWf8mFe40Tw

Try to imagine the stock market NOT EXHIBITING patterns that can be mapped to some power law distributions retroactively. It's impossible (unless the market were constantly gapping randomly---i.e. not exhibiting any semblance of continuity). In retrospect, certain particular mappings are going to show scale independence---this fact is obvious because the stock market neither moves in a straight line, nor exhibits invariant repeating patterns (i.e. patterns that could be modeled using Fourier series). Because the only independent dimension is price (time being trivial), a stock chart MUST EXHIBIT these patterns. Nothing about this observation implies that future patterns are predictable based on past patterns. And nothing about this observation contradicts the underlying argument of The Fundamental Error of Elliott Wave Theory. In particular, as patterns become more "crude"---i.e. during major moves such as crashes---the likelihood of retroactively showing analogous patterns to other "crude" phenomena increases to the point of certainty.

ReplyDeleteIronically, these particular examples of natural patterns (earthquakes, epileptic seizures etc.) are especially illustrative, because they SUPPORT rather than refute the argument of The Fundamental Error of Elliott Wave Theory. Unlike planetary orbits or the shapes of electron wave orbitals, these phenomena are notoriously unpredictable outside of extremely static laboratory conditions. And the reason for this is that not all of the input variables influencing any particular case are known and/or can be quantified/modeled in a manner that would allow for sufficiently robust predictions of what is going to happen in the future during the event itself. In retrospect, of course, a function can always be found that maps out the pattern. Here I must repeat---the point of The Fundamental Error of Elliott Wave Theory is that, throughout history, "mysterious" natural patterns became predictable once their major, underlying inputs were discovered, quantified, and then plugged into a unified, robust model. No analogy to this process can be contructed for the stock market, for the reasons I explain in The Fundamental Error of Elliott Wave Theory. You must reread it.

I cannot comment on the relevance to The Fundamental Error of Elliott Wave Theory of the number of EWT newsletter editors or subscribers.

Stumbled across your well written blog post.

ReplyDeleteI fully agree with JB's post in that EW accounts for cycles of human psychology as a primary indicator as opposed to being a clinically mathematical formula.

As a successful day trader, Using EW does not benefit me in any way. Ultimately, I make money through observing the movement of live price to predict it's likely future path, i.e pattern recognition.

For me, anything beyond simplicity adds complication and increases risk of failure.

Thanks for your comments. I think where you and I disagree is over the word "accounts". I would use the word "labels". So I consider that EWT "labels cycles" rather than "accounts for cycles". Such labeling is just a form of taxonomy (it's entirely retroactive) and therefore provides no information about the future. It's no better than if you decided to give the names "Bob", "Bill", and "Yolanda" to a series of prior trends on a chart. You wouldn't know what the next wave looks like, even if you held a roster of names and expected "Beatrice" to be next. But I would go further, and even strip away the meaning of the word "cycles": EWT is a method of labeling "cycles of price" rather than cycles of "human psychology". The reason for this is that the waves EWT seeks to label don't only reflect psychology. They also reflect countless other phenomena that are entirely independent of human emotion. The word "price" is the only one that adequately describes this confluence of factors. Thus, EWT labels "price cycles" retroactively, providing no useful information. This is evident from the numerous disagreements between EWT theorists about how these retroactive labels should be applied. Of course, there will always be a sufficiently diverse pool of differing EWT predictions to allow for one of them to be "correct" in retrospect. Those who were "incorrect" inevitably "blame themselves" for misapplying EWT, rather than questioning the essential mistake of the underlying theory itself. Thanks for your compliment on the writing.

ReplyDeleteThank you for your considered reply to my comment (November 25, 2010 11:21 AM).

ReplyDeleteI cannot disagree with anything you have said in your reply.

Best of luck in your endeavors.

This is the best critique of EWT I've ever read!!

ReplyDeletegreat lesson to those wavers trying to rationalize every wild move in the market/

ReplyDeleteThanks for reading.

DeleteThis comment has been removed by the author.

ReplyDeleteWhat a sad world you live in.

ReplyDeleteOf course Elliot Wave AND also Fibonacci DONT Work they have ONLY made their Creators/Authors RICH try #MULTIDIAGONALS the ONLY Predictive Tool

ReplyDeleteSuch a nice blog,i never ever had seen earlier this type of blogs which contain this type of information.. I really appreciate your effort thank you for sharing this information which really very-very good for the users as well as for mine..

ReplyDeleteWhy don't you try trading commodity futures, FX or the Stock market using the results provided by a reputable Elliot Wave Technician then make specific judgements. Your ethereal far fetched BS is worthless to someone that wants to make money (i.e. a living) trading Futures or other financial instruments. I do use EW counts provided by an outstanding EW Specialist who knows when to trade the wave patterns and when not to trade. This is the difference between trading impulse waves and not trading corrective waves such as B-Waves!

ReplyDeleteExperience is the best teacher! Attempt to use EW in conjunction with other tools such as K-Wave and Hurst Models and find out what you are missing! Of course, it helps to understand how to trade the financial markets! You obviously have no clue about that!