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The Elliot Wave Hypothesis
How can it be possible that such a theory with so many followers, and that has had so many books written about, be fundamentally flawed? Like many of our beliefs, they have an appeal to our desire for order and meaning. Many will accept such beliefs without any further questioning as it appears to provide the answer they have been looking for. There are two other important reasons however. Fanatical Elliot disciples won't tolerate any criticism of their pet theory, and some even become angry at the suggestion that they are not correct.
The first is that there are elements of truth. By this I mean that Elliot's observations are accurate in that patterns repeat and that Fibonacci ratios are apparent in the market. What has gone wrong is the interpretation of these facts. This is not Elliot's fault , as the knowledge about chaos and complex systems wasn't available. It is is latter day disciples who should know better and stop deluding the naive investing public with their voodoo.
The second reason is that the theoretical tools haven't been available to provide anything better. Quantal Theory allows us to deconstruct Elliot, and produce a modified theory. Elliot theory when applied correctly, is still the best way to describe wave patterns.
The Natural Order in the markets
Rather than be a mystical "Grand Design", the "order" that Elliot saw were patterns of chaos. These patterns are families of self-similar fractals. A fractal is a piece of visual plasticine from which we can manufacture other patterns that are similar over any scale. Many have derided Elliot Wave theory. I don't. However I believe that you need to know its limitations. It gives some excellent insights into the markets.
The nature of fractals is that they are self similar, that is patterns repeat, and are recognizable by us. They also "morph" and this allows us to see many patterns. It depends on your bias what you want to see!
The rules
Elliot Theory has many wave naming rules. Ultimately, these rules reduce to identifying an impulse or correction, which in turn reduces to trend identification. The rules ensure that the wave forms that are selected meet the criteria of a trend. Hence the primary and useful function of the rules is to define a trend rather than a pattern that can have more than 1 interpretation. Quantal Theory has a simple trend identification technique.
For example, if there is an impulse, and what we think should be a "correction" then "corrects" too far, we can then re- interpret the pattern as a trend change.
Fibonacci ratios.
These are not mysterious magic numbers, but a stable growth limit, that once reached, is followed by collapse. It defines "an edge of chaos". This explains the basic wave structures and counts. Elliot was brilliant in his recognition of how important they are in the market, but mystified these relationships as some time of magical order being behind the markets that co-ordinated and was expressed by wave forms.
New Elliot Discoveries
When an Elliotician or piece of software "discovers" a new pattern, it is a set of fractals that have self organized under a new set of market conditions. The really useful discovery about Elliot comes when you use Quantal Theory to see the complex and chaoatic patterns in the market, and then discover how Elliot's rules can be applied in a new powerful way.
This is a graphical proof that the Elliot Wave fanatics are deluding themselves.
This is a series of figures that are based on the fractal nature of the markets.
We start with 2 points represent separate trades with all intervening trades being at prices between these. Other than trades occurring in immediate sequence, there is usually a point where the price reverses before resuming the move to the second point.
As long as these starting points are far enough apart, we can continue to subdivided them and find smaller divisions, where reversals take place. These subdivisions form waves. Thus any wave count can be produced, and also collapsed. The following diagram shows how starting with only 2 points, "progressive zooming in" allows different wave counts. The starting points remain the same and it is these that are used to define the trend .If the trend is up, it is "ipso facto" that the wave pattern will have to follow this, and not the other way around. The trend defines the pattern, the pattern follows the trend!
We can see that the typical Elliot Wave counts of 3, 5 etc. emerge as we "zoom in": and select lower degree waves between our initial points. This occurs as long as we have chosen a large enough data interval.
There are several other areas where Elliot Wave theory is misleading. It would take a lot of space to explain all the reasoning behind these, however they are scientifically valid, and based upon complex system theory. They will be explained in detail in a future publication, where the free index reading course is expanded, and a revised Elliot method published.
These misleading areas are:
The relevance of scale
The effect of the past upon the future
Sol's comments
I have never believed in any wave principles and this has nothing to do with Elliot personally, I also do not and never will full believe in any mechanical system, there is a reason they are called mechanical, because everything mechanical shall and will break down one day. So you devise a mechanical system that cannot adapt and you will end up like the dinosaurs sooner or later, this goes for all mechanical systems. However that does not mean you should not try them or pay for them, it's your money feel free to spend it or waste it whatever manner you see fit and these are just my opinions, could I be wrong, I would be a fool to say " NO". Off course I could be wrong, but logic, history and Mass psychology illustrate that repetition is not the way to salvation. I will end with this statement.
Those who do not learn from history are doomed to repeat those same terrible mistakes 100 fold.
It takes 50000 nuts to put a car together, but only one to scatter them all over the road.
Daryl Somers
In the first place God made idiots. This was for practice. Then he made School Boards.
Mark Twain 1835-1910, American Humorist, Writer
I don't want anything I don't deserve, [but] if they offer me more money, I'm not stupid.
Antonio Banderas 1960-, Spanish Actor
It is against stupidity in every shape and form that we have to wage our eternal battle. But how can we wonder at the want of sense on the part of those who have had no advantages, when we see such plentiful absence of that commodity on the part of those who have had all the advantages?
William Booth 1829-1912, British Religious Leader, Salvation Army Founder
To be clever enough to get all the money, one must be stupid enough to want it.
Gilbert K. Chesterton 1874-1936, British Author
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