The Limitations of Elliott Wave Theory in Technical Analysis
The Limitations of Elliott Wave Theory in Technical Analysis

The Limitations of Elliott Wave Theory in Technical Analysis

Elliot Wave Theory

 Updated in Feb 2023

 Elliot Wave Theory: Debunking it

Alas, most traders doth fall into one of two camps, those that opt for Technical Indicators or those that claim Fundamental Analysis holds the answer to winning in the stock markets. Sadly, both parties art wrong. Technical Analysis can be even worse than Fundamentals as it hath fanatics that claim systems like the Elliot Wave can predict huge moves in advance. Our experience hath taught us that Elliot Wave is useful, and the only part that is useful is the wave – as in waving goodbye to it.

Elliot Wave

Individuals, especially novice players, art oft led astray when it cometh to Technical Indicators and trading. One school pusheth technical indicators, while the other pusheth for fundamental analysis.

Fundamentally, analysis is naught but a mechanical system in disguise. The data is provided in a standard manner, and so anyone can decipher it with almost no effort.

Mechanical trading systems put forth a set of rules; all one has to do is follow these rules. Hence, everyone following these rules could arrive at the same conclusion.

The paradox theory states that one shall receive exactly the opposite of what one chases. The same holds true in the arena of technical indicators and trading. One shouldst be realistic and not assume that these indicators alone wilt always keep thee out of harm’s way. We all know that at any given time the masses must lose to be able to feed the big players. ‘Tis why the 90/10 ratio hath almost seen no variation over the decades. 90% represents the percentage of losers, and 10% represents the proportion of winners. Therefore, it is of utmost importance to understand the basic principles of basic portfolio management before committing thy wealth to the financial markets.

The Flaws of Elliott Wave Theory

Elliott Wave Theory, a favoured technical analysis tool used to predict future price movements, is not without its limitations. In fact, the theory is a standalone trading strategy rife with flaws that can lead to lower profits or losses.

One of the primary limitations is that it is exceedingly subjective, leaving traders to interpret waves and sub-waves in the price movements of an asset, which can result in ambiguity and vary depending on the trader’s perspective. It also leaves traders to rely on their own judgement to determine when to buy or sell, leading to missed opportunities or premature exits.

Moreover, Elliott Wave Theory often creates conflicting signals with other technical indicators, leading to confusion and uncertainty for traders. In some cases, the theory may indicate a trend reversal, while other indicators suggest a continuation of the current trend, leading to missed opportunities.

That said, Elliott Wave Theory can still prove useful when integrated with other technical analysis methods as part of a comprehensive trading strategy. Nevertheless, it is critical to remain cognizant of its limitations while taking other aspects, such as market trends, news events, and sentiment analysis, into account.

Black Box Systems: The Truth About Elliot Wave Theory

Ahoy there, fellow traders! ‘Tis a grand day for a discussion about the pitfalls of mechanical trading systems, is it not? Now, it’s true that mechanical systems lack the nuance and fluidity required to truly succeed in the markets. You see, the markets are a complex tapestry woven from the emotions and opinions of millions of participants. To believe that a set of rigid rules, devised by one mere mortal, could accurately navigate such tumultuous waters is folly indeed.

The very term “mechanical” is revealing in and of itself. Merriam’s Webster defines it as “done as if by machine, seemingly uninfluenced by the mind or emotions.” Can you imagine trying to sail a ship without taking into account the whims of the sea or the intuition of the captain? ‘Tis a recipe for disaster, I tell you!

The markets, like the sea, are a tempest of human emotions – greed, fear, hope, and the like. To ignore this fundamental aspect of market behaviour is to invite failure. Technical indicators can certainly be a useful tool in one’s trading arsenal, but to build an entire strategy around them is to court catastrophe. So heed this advice, dear traders, and remember that a pinch of contrarian thinking and a dose of emotional intelligence can take you much further in the markets than any mechanical system ever could

Limitations of Trading Indicators and Mechanical Systems 

‘Tis a curious thing, the way we choose to label and categorize the things we deal with in the markets, is it not? The Elliot Wave system, for instance, is but a mechanical construct, doomed to fail at some point in time. And yet, we persist in relying on such systems, as if they could somehow conquer the vagaries of the market.

The terminology we employ is equally puzzling. To be “bullish” or “bearish” on the markets, we choose to align ourselves with two of the most irrational and temperamental creatures in the animal kingdom. And if we have a particular affinity for a certain sector, we label ourselves as “bugs” – be they internet bugs or gold bugs. The very notion of associating ourselves with such a reviled creature is curious, to say the least.

One can’t help but wonder if this predilection for mechanical systems and absurd terminology is a manifestation of some sort of subconscious secret desire to lose.  But what does it say about us as traders, if we choose to align ourselves with such foolishness? Perhaps it’s time to cast aside these mechanical contraptions and embrace a more nuanced and fluid approach to the markets. One that takes into account the human factor, rather than ignoring it.

Irrationality on display

It’s interesting how we often associate the markets with such negative imagery. Being “bullish” or “bearish” paints a picture of two irrational creatures while labelling oneself a “bug” suggests a certain distastefulness. It seems we have a tendency to view the markets through a lens of negativity.

Perhaps it’s time to adopt a more positive and sophisticated terminology that better represents our views and positions in the markets. After all, we are intelligent and thoughtful traders, not easily swayed by emotions or irrationality. Let us strive for language that accurately reflects the level-headed and calculated approach we bring to our investments


The Drawbacks  Mechanical Trading Systems

Indeed, the language we use in the markets often betrays a deeper psychological issue. Words like “scalp,” “plunge,” and “down thrust” evoke a sense of violence and instability, as if the market were a battlefield. This sort of language reinforces a negative and short-sighted view of the markets, and it is passed down from generation to generation.

It’s no wonder that we continue to make the same mistakes as previous generations, only on a larger scale. The recent speculative bubbles in credit, real estate and the COVID crash are a testament to this cycle of repeated error. It’s high time we break away from this negative, primitive way of thinking and adopt a more sophisticated and enlightened view of the markets. Only then can we hope to escape this cycle of destruction and build a brighter future for ourselves and the generations to come

The Importance of Good Money Management in Trading

Managing money correctly is crucial for success in the financial market. Neglecting to do so can lead to high risk and potential losses. Effective money management involves setting stop-losses, diversifying portfolios, and managing risk effectively.

Debt-fueled spending on unneeded goods is a common problem and the real estate bubble is a prime example of history repeating itself in a big way. People taking out home equity loans to finance their lifestyles is a recipe for disaster.

To achieve success in the market, it’s important to approach it as a game and understand the behaviour of the masses. One can then focus on mastering a few technical analysis tools, which are open to personal interpretation. These tools should never be standardized, as this could lead to failure. The key is to correctly master these tools and come out ahead. The lack of standardization means this approach can be successful for an indefinite amount of time

Lifestyle Reflections in Mechanical Trading System

The 9-5 work routine and the monotonous behaviour pattern, where everyone thinks and acts in a similar manner, reflect a lack of independent thought and creativity. Similarly, a mechanical system, which relies on standardization, represents the tendency for individuals to avoid thinking and instead rely on prescribed methods. The result is a failure to learn from history, leading to the repetition of past mistakes.

Making mistakes is a natural part of the learning process, but blindly repeating the mistakes of others without understanding their causes leads only to self-destruction. Breaking away from this pattern requires a shift towards independent thinking and critical analysis

 The Key To Success lies in customisation 

The adherence to mechanical systems, such as the Elliot Wave theory, often lacks the ability for customization. Memorizing patterns and interpreting them becomes the norm, rather than adapting the system to personal needs. Yet, the simplest and most effective system, trend analysis, is not widely adopted. The principle behind trend analysis is simple – identify a new trend and remain invested until it ends. This requires the skill of drawing simple lines, which can be honed with practice, and provides tremendous value in the market.


Exploring Unconventional Technical Indicators for Better Trading Insight

To achieve success in financial markets, it is important to understand the psychology behind the market and its participants. This includes being aware of the language used in the market, as well as the reasoning behind it. For instance, the terms “bullish” and “bearish” are based on the behaviour of easily agitated animals, while terms such as “scalp,” “plunge,” and “upthrust” reflect the psychological state of those involved in the market.

Additionally, it is crucial to understand the importance of proper money management in financial markets, including the setting of stop-loss levels and the maintenance of a diversified portfolio. Good money management helps to reduce the risk of losing money.

Investing strategies such as Elliot Wave theory, which is followed by many, should be used with caution. While it can provide a certain level of understanding of the market, it can also limit the flexibility of one’s strategy. It is better to consider using trend analysis, which is a simple and efficient system.

Ultimately, a successful investment strategy should be based on a clear understanding of market psychology and a willingness to think critically. Customizing strategies to fit one’s needs, as opposed to blindly following a set system, can lead to better results. Consideration should also be given to contrarian investing, which involves taking positions against the masses, and mass psychology, which measures the level of frenzy or extreme sentiment in the market.

Mass Psychology Vs Elliott Wave Theory

Ya see, Mass Psychology don’t just measure the frenzy or extreme hatred towards a certain sector, but it also gauges the level of euphoria among the folks that believe in that investment. It keeps tabs on how many of them darned “contrarians” have now become bullishly euphoric in a given industry.

You see, most times when a contrarian takes a position against the herd, they do it with a wary eye, always keepin’ a close watch on their investments to make sure they ain’t losin’ their shirts. But, once the sector starts to show some returns, they lose that nervousness and start feelin’ real good about things. That’s when Mass Psychology starts to play its hand.

It’s at this point, my friend, that the smart investor knows it’s time to get outta dodge and take their profits. Ya may not be sellin’ at the absolute top, but ya’ll be mighty close. That’s the beauty of thinkin’ outside the box and playin’ the long game.

Once the sector starts to take off and produce returns they lose this nervousness and become very bullish; in other words, they have now entered the euphoric phase. This is where mass psychology kicks in. At this point it will be time for the smart investor to bail out, you may not be selling at the top, but you will be pretty close to it. Sol Palha

Additionally, incorporating contrarian out-of-the-box thinking into your investment strategy can be a game changer. In the cut-throat world of finance, it’s easy to get caught up in the herd mentality, following the crowd and making decisions based on what everyone else is doing. But true success often comes from bucking the trend, going against the grain, and thinking creatively.

And let’s not forget the importance of discipline. In order to be a successful investor, you must be able to stick to your guns, even when the going gets tough. This means having a well-thought-out plan, setting clear goals, and not deviating from your strategy, even when faced with temptation. It’s not easy, but the reward for staying the course is well worth the effort.

So there you have it folks, a recipe for success in the financial markets. Master the art of mass psychology, become a technical analysis wizard, incorporate contrarian thinking, and always be disciplined. With these ingredients, you’ll be well on your way to trading success!

The Limitations of Elliot Wave Theory in Measuring Panic & Crowd Hysteria

We saw the COVID crash of 2020 as a golden opportunity. To us, it was a blessing in disguise. We seized the moment and went on a buying spree, acquiring as many high-quality companies as our budget would allow. The masses were panicking, but the insiders were calm and collected. It was clear to us who we wanted to place our bets on. The trend indicators were also in our favour, validating the positive trend in the market. It was a prime example of contrarian thinking and the rewards of being patient and disciplined in our approach to investing.

And as an experienced investor, it’s always best to stay ahead of the curve by thinking outside of the box and embracing a bit of contrarian thinking. After all, it’s when the masses are in a panic that the true opportunities for profit present themselves. Just take a look at the current sentiment data. The crowd may be in a state of hysteria, but the insiders are calm and collected. Who would you rather place your bet on? The answer is clear, the smart money always follows the insiders. And when our trusty trend indicators confirm that the trend remains positive, we know we’re making the right move. So, let’s embrace that unconventional thinking and make some profits!

 Insiders are not just buying shares, they are devouring shares. Insiders behaved in a similar fashion in late-December 2018, after stocks crashed on Christmas Eve; in early 2016 when stocks also corrected; and in late 2008/early 2009, at the depths of the Great Recession correction.



Warren Buffett Portfolio

“Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist”.

“Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%”.

Research Suggests Elliot wave theory is flawed

Elliot Wave theory is a widely debated and controversial subject in the field of technical analysis. While some traders and investors claim to have success using the Elliot Wave theory, there is also a significant amount of criticism and research that challenges its effectiveness.

One study published in the Journal of Behavioral Finance found that “Elliot Wave analysis does not provide statistically significant information for forecasting stock returns beyond what is already provided by the market trend.”

Another study published in the Journal of Empirical Finance found that “the performance of the Elliott Wave Theory principles is not statistically different from random.”

Additionally, a paper published in the Journal of Economics and Finance Education concluded that “there is no evidence that the Elliott Wave theory has any value in the prediction of stock price


The Elliott Wave theory Principle: A Critical Appraisal” by Robert Prechter and A.J. Frost (1985). This book provides a comprehensive critique of the Elliott Wave theory, challenging its validity and pointing out its shortcomings.

“Can Technical Analysis Beat the Random Walk?” by Eugene Fama and Kenneth French (1998). In this paper, the authors examine the efficacy of various technical analysis techniques, including Elliott Wave theory, and find that they have no predictive power in beating the random walk.

“The Realities of Elliott Wave Theory Analysis” by David Aronson (2007). This book provides a detailed examination of the Elliott Wave theory and its applications, exposing the flaws and limitations of the theory.

“Empirical Evidence on the Efficiency of Technical Analysis: A Review of the Literature” by J.D. Mackinlay (1995). In this paper, the author provides a comprehensive review of the literature on the efficacy of technical analysis, including the Elliott Wave Theory, and concludes that there is little evidence to support its effectiveness.

“Empirical Tests of Technical Trading Strategies: A Review of the Literature” by David Rapach and Mark Seto (2010). This paper provides an overview of the empirical evidence on the effectiveness of technical trading strategies, including Elliott Wave theory, and finds that there is limited evidence to support its effectiveness.

“The Profitability of Technical Analysis: A Review” by J. Peter Steidlmayer (2005). In this paper, the author provides a comprehensive review of the literature on the profitability of technical analysis, including Elliott Wave theory, and finds that there is limited evidence to support its effectiveness

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