Upon first hearing about the Elliott wave principle most people have one of two reactions.
Many will disclaim the concept that it is social mood which moves the markets (it’s normal to think it’s the other way around) and they will insist that the market cannot be patterned and must be random. That’s okay. If this is how you think you’re with the majority. I must ask though, if the market is random then how do some people manage to consistently profit from trading it?
Others may think that they have found a magic bullet and can use Elliott wave to tell them where and when the market will move with enough accuracy to profit from the principle. This is problematic for a few reasons.
If you are already a trader then I would point out that you probably do not make trading decisions using only one technical analysis tool. This would be extremely unusual and mostly confined to those new to trading. Most traders know that in order to make good trading decisions a variety of tools should be used. Elliott wave is no different. It is best used as one tool amongst several when making trading decisions. If a wave count agrees with your other tools you may have increased confidence in your trading decision. If the wave count disagrees it is up to you to decide what to do based upon your risk appetite and experience.
However, Elliott wave is one of the most difficult tools to learn to apply. It takes years of daily analysis to become truly proficient and it takes hours each day to analyse a market in enough depth for the analysis to be useful to traders. This is why traders subscribe to my service.
Elliott wave is the best tool I know of for predicting price direction. It can sometimes be uncannily accurate in target calculation. Sometimes does not mean it is always accurate though, as not all waves have Fibonacci ratios between them. Elliott wave cannot always be accurately applied however because the analyst who never makes mistakes simply does not exist. No method will have 100% accuracy.
At any one point in time there may be multiple alternate Elliott wave counts possible. An expert analyst should be able to see as many alternates as possible and present them ranked in order of probability. Probability of a wave count is based upon several factors, the strongest being the likelihood of the structure unfolding. If the structure is common the wave count would have a higher probability. Rare structures must have a low probability. This means that when a rare structure unfolds (as probability says they must do sometimes) then the analyst would have advised that wave count has a low probability and would not have expected price to move in that direction. Many people fail to understand how probability works in Elliott wave and so dismiss it when they see an analyst make a wrong call when a rare structure unfolds.
Most of the time it is common structures which unfold, that’s why they’re common, and most of the time an analyst should predict the next movement correctly.
A common complaint of Elliott wave is changing targets. Again I must say that you would not expect any other technical analysis tool to predict tops and bottoms and be always right, and for a prediction once made to never change. Why should Elliott wave be any different? There are several Fibonacci ratios. No analyst is going to be able to predict which Fibonacci ratio will be the relationship which is eventually seen. All an analyst can do is to state which is the most commonly seen ratio (there’s that probability again!) and calculate targets based upon several possible ratios ranked in order of probability, or in price order.
Another common complaint of those new to Elliott wave is an analyst changing a wave count. This complaint shows a depth of misunderstanding of not just Elliott wave but markets in general. If an analyst were to never change a wave count what they must do is to pick the right wave count from the very start of a movement amongst several possibilities, and they must pick the right wave count even if it has a lower probability than others. Which is patently ridiculous.
If you can get past the initial enthusiasm and see Elliott wave for what it is, an exercise in probability, then you’re on your way to learning how to profit from it.