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Elliot Wave Theory: Myths & Fears

In this article we shall demystify 5 fears and myths of the Elliot Wave Theory.  The Elliott Wave Principle is a form of technical analysis that traders use to forecast market trends. It is observed that many people don’t understand the meaning of it and therefore, misinterpret it. They relate to it emotionally instead of practically, which is often in a negative approach. It is also known that some people state, the Elliott Wave “must be some type of cult”. But in actuality nobody has to shave the head or drink goat’s blood while humming ‘Hare Krishna’. In fact it takes very little to be an Elliott practitioner. However, the reason the theory is being criticized is:

1)     Unpopularity of the Wave Theory- It is the human tendency to be unresponsive to something they aren’t aware of. The Elliott theory is unheard of, by most of the people and hence, is doubtful by them.

2)     The second and the most common myth is that Elliott Wave Theory is closely related to Robert Prechter. But to be an Elliott Wave Theorist, one need not be tied to Robert Prechter.

Apart from these mistaken beliefs there are many more objections to this theory. The objection/answer format helps to understand better.

Objection: “I’ve heard at least 10 different interpretations of this market from 10 different Elliott pros.”

Answer: Just as everyone has their own opinions and there are agreements and disagreements, the Elliott Wave Theory does not agree with Joe Bagga wave theory, just because he entitles himself as ‘Elliottician’. Had there been an infallible system, nobody would need any explanation and use it anyway.

Objection: “Robert Prechter!  Blahblahblah!”

Answer: It isn’t a requisite to be a Robert Prechter fan to be an Elliottician. There’s a reason the theory was not named after him, but Ralph Nelson Elliott (The person who discovered the theory). Some Ellioticians are obliged by him to draw their attention towards the theory but aren’t impressed by him to apply the theory. Prechter does have considerable contributions but Ellioticians are not to follow any of his cults.

Objection:  “(Insert really well-reasoned objection, possibly containing a bunch of Latin words, which basically argues that the future is simply unknowable due to a preponderance of variables.  Add exclamation points as needed, which, with some imagination, seem to be dripping with spittle)!!!”

Answer: Some people in the Company are aware about the stocks releasing bad earnings in the next quarter and therefore, start dumping the stock. Influenced by their act some insiders imitate them in dumping the stock and this goes on. Suddenly, the stock is down by 30%, months ahead of the bad news, which “nobody” knew about. Stock prices depend on the aggregate demand and supply. Just as, if you shout ‘fire’ in a crowded place, people tend to panic and cause chaos. But if you do that in a room where only a single boy is seated, he might run for the door or ignore you thinking that you’re insane or just punch you in the face. Individuals acting alone are vastly more unpredictable than are a group of people competing over the same resources.

Objection:  “I remember this Elliott Wave guy, and he predicted that the market would (crash/skyrocket) and it (skyrocketed/crashed) instead!  So THERE.”

Answer: The Elliott Wave Theory does not draw its construal from that of other theories. It is independent of its elucidations and therefore, sometimes it’s likely to not have complete information or read the information wrongly. The analysis involves pure prediction in many cases and prediction may not always be right. Some judgments made in our day to life also go wrong, despite good experience.

Objection:  “Why do we have hot water heaters, when ‘hot’ water doesn’t need to be heated?”

Answer: There is no explanation for this.  Also, this forum is supposed to be for objections to Elliott Wave Theory.

“Oh, whoops.  Sorry.”

“I was following this Elliott guy, and he completely changed his count!  For a while, he was predicting a new bull market — but then suddenly he said something about the fifth wave, and the third of a fourth or something, I don’t know, I thought he was talking about socket sizes or wrenches.  Anyway, then he started predicting a bear market!  If the theory’s so good, how come he was so far off?”

Answer: Well, first off: good for him for recognizing the situation had changed.  There are always numerous possibilities.  What good Elliott theorists do is parse the information available to them; then they decide on the count they view as the most probable, based on their analysis (they call this count their “preferred” count).  But it’s rarely clear-cut, and the market doesn’t always tip its hand in advance.  Just as a traditional technical analyst might project a target from a head and shoulders breakdown, then recant that target when the price whipsaws, Elliott technicians must do the same with our patterns.  The main difference with Elliott is the patterns are quite a bit more complicated and sometimes harder to explain to a non-Elliott theorist in ten seconds.   

These were some of the major objections faced by the Elliott Wave Theory. However, the real objection is because of instinct suspicion on the theory.

 So, in conclusion: best of luck to the skeptics in their chosen disciplines.

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