Elliott Wave Criticisms, for every trading “technician” who swears by Elliott Wave, there is another trader who laughs at it.
I’ve never approached the markets from an EW perspective so when asked what I thought, I had no proper answer.
What I’ve done is compiled a list of reasons why you may want to reconsider Elliott Wave and perhaps use your time to define another way to approach the market.
I’ve searched the web to see what are the Elliott wave criticisms that I can find and in here, I’ve compiled a list of them. Hope you enjoy it and don’t forget to share and tweet at the end.
What Is Elliott Wave Theory?
The Elliott Wave Theory is also called the Elliott wave principle and here’s what wikipedia had to say about Elliott Wave Theory:
- The Elliott Wave Principle is a form of technical analysis that traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors.
- Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s.
- He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves.
- Elliott published his theory of market behavior in the book The Wave Principle in 1938, summarized it in a series of articles in Financial World magazine in 1939, and covered it most comprehensively in his final major work, Nature’s Laws: The Secret of the Universe in 1946.
- Elliott stated that “because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable.”
- The empirical validity of the Elliott Wave Principle remains the subject of debate.
#1: Wave Prediction Is A Very Uncertain Business
Benoit Mandelbrot, a mathematician criticizes the Elliott wave theory by saying this:
>It is an art to which the subjective judgement of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed.
#2: The Elliott Wave Principle Is Too Vague To Be Useful
Elliott Wave Critics say this because:
- you cannot consistently identify when an Elliott wave begins
- and also you cannot consistently identify when an Elliott wave ends.
Which means that your Elliott wave forecasts are prone to subjective revision.
I personally find this criticism to be quite true…it is very difficult to identify the start and end of Elliott waves especially on the hard right edge of the chart.
#3: Elliott Wave Theory Has No Value
This is what David Aronson, a technical analytist had to say about the Elliott Wave Theory:
- The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter.
- The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations.
- I contend this is made possible by the method’s loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude.
- his gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.
#4: You Will Not Recognize An Elliott Wave Until It Has Already Passed
In this article on thismatter.com, it hits the nail on the head when it mentiones the difficulty of recognizing elliott wave patterns:
- The 1st major problem is that you cannot really recognize an Elliot Wave until it has already passed. So how can you make any forecasts or make trades based on it? After all, the Elliot Wave is simply a series of movements with the trend followed by retracements.
- The only thing that seems to be unique about it is that the retracement of Wave B is less than the 5th subwave. Otherwise, the Elliot Wave would just be a series of up and down movements, which is easily observable in stock charts or prices, but doesn’t help in forecasting prices or directions.
- Elliot was, however, more specific about his Waves, but whether the wave satisfies the necessary criteria to be an Elliot Wave can only be determined after the wave has already passed. For instance, Elliot said that impulse waves 1, 3, and 5 are impulse waves, and that Wave 5 retraces at least 70% of Wave 4. But then what if Wave 5 doesn’t retrace at least 70% of Wave 4? And needless to say, you can’t know this until Wave 5 has already passed.
#5: Elliott Waves Are Not Quantified Precisely Enough to Use In Trading Decisions
The article in thismatter.com also gave a scathing attack on Elliott wave theory with this:
- The other problem is that the waves are not quantified precisely enough to use in trading decisions. Everyone knows that the stock market goes up and down at various times; however, this information isn’t really useful without knowing when it is going to go up or down and by how much.
- Even to say that the waves have a specific form is not really useful without times and price targets. This is probably why Elliot started applying the Fibonacci ratios to his Waves in the 1940’s. There have been studies showing that Elliot Waves in the Dow Jones Industrial Index do not exhibit Fibonacci ratios most of the time, and, furthermore, there is no reason to believe that they would! Indeed, if Elliot Waves did have these ratios, why didn’t Elliot discover these ratios before he learned about the Fibonacci numbers? After studying and looking at his Waves for at least several years, he probably would have noted that they have a specific proportion. It is clear that he learned about the Fibonacci sequence first, then applied them to his Waves—but if his Waves actually had those ratios, he would have discovered them even without knowing about Fibonacci numbers!
- Although Elliot noted that some waves had sequences or ratios that roughly corresponded to the Fibonacci sequence, or the golden ratio, or some permutation of these numbers, these relationships were mostly the result of curve-fitting. However, the relationships are not specific enough nor do they occur in a predictable repetition that would enable an Elliottician to forecast the market.
#6: Elliot Wave Trading Is Difficult…Almost Like A PHD Pursuit
Believe it or not, understanding Elliott wave theory and trying to trade it in real time is difficult. Incredibly time consuming to learn when there are quite a few others way to approach the market that actually have a verifiable edge.
The other first 5 reasons given above has mentioned this but take it from the point of a completely new Forex trader wanting to learn to trade Forex, this would be like sitting for an exam or studying for a PHD.