Disclosure: Our content does not constitute financial advice. Speak to your financial advisor. We may earn money from companies reviewed. Learn more
Last Updated on: 2nd March 2020, 02:49 pm
Elliot Wave Theory is a method of technical analysis employed by financial traders as an indicator of market trends with an emphasis on investor psychology. First proposed by Ralph Nelson Elliot in the 1930s, it has become an oft-debated principle and its validity is a divisive issue. In this article, 5 experts discuss whether the Elliot Wave Theory is a scam, or is there truth to the theory.
Table of Contents
- A Lot Of Trading Methods Are Discounted Based On A Misunderstanding Of How One Is Supposed To Apply Such A Theory Or Method
- Elliot Wave Theory Depends Upon The Judgment Of The Forecaster Rather Than An Empirical Model
- Elliott Wave Theory Is A Very Poor Predictor Of Market Outcomes At The Very Least
- Elliot Wave Theory Is A Very Important Technical Indicator, But It Cannot Be Used Alone
- Investment Styles Can Be Broken Into Technical Analysis And Fundamental Analysis
A Lot Of Trading Methods Are Discounted Based On A Misunderstanding Of How One Is Supposed To Apply Such A Theory Or Method
“In the financial trading industry, there is a lot of trading methods discounted based on a misunderstanding of how one is supposed to apply such a theory or method. That's why so many new traders fall into the 90% of failure category because they dismiss a strategy or theory because they simply don't understand it in its entirety or they are too overwhelmed and then they give up.
I believe Elliot wave falls into a category much like a lot of technical analysis that is rubbished by some and championed by others. Although, some of the most successful and famous traders in the world such as Ed Seykota used technical analysis to amass huge fortunes and many money managers apply a wave theory as part of a larger analysis framework. The aim of any trader is to make money without risking too much to make it. How you get there shouldn't matter as long as it works and the reward is asymmetrical to the risk.
Elliot wave theory has been around since the late 1930s and is based on market participant (speculators) behavior or crowd psychology if you like over larger cycles.
Crowd behavior and the collective psychology can be observed over historical data just looking at the charts of different assets. The five wave count is not obvious at its foundation but after wave 1 and 2 has formed and has been confirmed wave 3 is normally the most impulsive and largest move. Elliot Wave Theory is a behavioral observation and is representative of crowd psychology over longer cycles and therefore debunks the scam element that may be implied.
To conclude, applying the Elliot wave theory correctly in an approach to trading aids your probability framework, after all, trading is a game of probabilities.
Any analysis that aids probability that you fully understand should be applied if it suits your personality and trading style.”
Richard Seeley, Founder of Able Trading
Elliot Wave Theory Depends Upon The Judgment Of The Forecaster Rather Than An Empirical Model
“The Elliot Wave Theory depends upon the judgment of the forecaster rather than an empirical model. This do not mean the EWT is a scam but any favorable results by traders who purport to use EWT are either disingenuous or, at best, illustrate the survivor effect. The traders who happen to generate a profit while using EWT will have the funds to publicize their winning strategy while the EWT adherents who made different judgments and lost will not have the funds or the incentive to launch a campaign to seek investors or subscribers.
My view of the market is shaped by my rejection of random walk theory and the notion that the best judgmental systems combine fundamental analysis (to identify the markets that are over or underpriced) and technical analysis (to provide timing). Extreme volatility is often the telltale sign of a market that has peaked (e.g., the Nikkei average when it peaked).
If a forecaster happened to apply EWT when the market became extremely volatile and happened to read the waves to identify a sell signal, they'd probably make a profit. But, ignoring the fundamentals of the 1980's era Japanese economy and attempting to read the tea leaves and superimpose
waves is not only a ridiculous amount of unnecessary effort, it distracts the trader from the strength of convictions based upon the fundamentals and the timing assistance provided by more orthodox technical analysis.”
Donald Petersen, Law Office of Donald E. Petersen
Elliott Wave Theory Is A Very Poor Predictor Of Market Outcomes At The Very Least
“The Elliott Wave Theory is a proven scam. It's nothing more than a tactic to scare investors. Some even call it ‘astrology for finance'. It is just propaganda to sell books and services. Even if we were to give it the benefit of the doubt, it is a very poor predictor of market outcomes at the very least.
This has been going on for over 30 years, and you would think by now people know better that to trust something witch such negative views. People all over have negative experiences and still people choose to believe it.
There are now more sophisticated and oiled scams that have replaced it, but many people still believe in it. Always remember that if you continue to do what unsuccessful traders do, you will also be unsuccessful.
People may be able to offer to train you to be more successful, but in any situation including this one using yourself is your best asset. There are free resources everywhere that can do exactly the same thing such as videos and book, and they will not cost you a dime!
Save your money and focus on your work and investments. You will go much farther alone.”
Elliot Wave Theory Is A Very Important Technical Indicator, But It Cannot Be Used Alone
“As a financial trader, I had to study the Elliot Wave Theory. It is a very important technical indicator to study charts of securities that are traded on platforms. However, it cannot be used alone.
For a trade to be successful there are three important factors to consider; the technical indicators, the fundamental factors and the sentimental forces of the market for the time frame applied.
The Elliot Wave Theory like any technical indicator tries to find calm amidst the chaos of the market through patterns which Mr. Elliot called waves. These waves are based on fractals. In Mathematics fractals can be repeated infinitely, in capital markets what goes up must come down and therefore the Waves will break down the prices of securities into segments that can be analyzed (the fractals).
The waves cannot be applied alone on charts as they can give false indication especially when there is an important event in the market like a central banker speaking (sentimental force that moves the market). Also as a wave, an oscillator and a measure for measuring the volume of the security being traded would provide an even clearer indication of the security traded.
It is a reliable tool for markets and one of the most important technical indicators.”
Sabine Saadeh, Financial Trading and Asset Management
Investment Styles Can Be Broken Into Technical Analysis And Fundamental Analysis
“You can break investment styles into technical analysis (Elliott Wave) and fundamental analysis (Graham and Dodd).
Technical analysis is really good at explaining “what happened.“ Fundamental analysis is better at predicting “what’s going to happen.”
Technical analysis like Elliott Wave and so many others, attempt to identify patterns and assign human emotion (well, this happened last time, people will react the same going forward). Not true. We call that “data mining.” Who wins the Super Bowl, the length of a woman’s skirt, Santa Claus Rally’s- they all work until they don’t, and then technicians are very good at explaining why. Fundamental analyst like Warren Buffett, who was actually taught by Benjamin Graham, studies valuations – his favorite metric is tangible book value.
There is a group of individuals that do employ behavior finance to their fundamental analysis (my son is one) and they are called Econometricians- acknowledging that you can’t ignore human behavior, but their focus is still on fundamentals.
By the way, I have a list of the top 10 money managers of the 20th century- not a single technician is on the list.”
Mark Zinder, Past Senior VP at Franklin Templeton and former spokesman for Sir John Templeton
The general consensus seems to that the Elliot Wave Theory, at best, can only be utilized in conjunction with other factors being taken into consideration. Given the recent volatility of the stock market amid concerns of the spread of the COVID-19 coronavirus, the price of gold has soared over the past month. Taking this into account, now is a good time to invest in gold. That’s why investing in gold through your IRA makes sense. Yet, it’s crucial to always do your due diligence and consult a financial professional before making investment decisions. For those investors interested in this type of investment vehicle, here are the Top Gold IRA companies so you can get an understanding of your options within the space.