Elliott Wave theory - why does it work?

[oxusmorouz]

Agreed 100 % ,but here the question is Whether EW helps.Yes it helps ,given a choice of 2 stocks prior to entry if we know their wave position ,it helps for price expectations.

How, sir? Evidence for this is what I seek and by evidence, I mean enough unbiased data to be confident.

With back testing we can be relatively confident.But projecting price,means expectancy,which can not be backtested,where EW steps in.You are very right that we all have lots of drawdown (for those entries also EW was used),MACD / MA crossover / etc may have been used ,so what do we conclude EW /MACD all wrong or my understanding was wrong ? My drawdowns cant be infered for EW's failure.

Sir, if you were not well, which method of treatment would you prefer...a medicine based on experiments with reasonable degree of confidence or prayer, untested and no evidence of cure (excepting a few cases whose results could have been triggered by chance). I am not questioning the effectiveness of the wave theory but just asking some evidence to believe it. It could be an outcome of narrative fallacy (I am not saying it IS, just that I have no reasonable grounds as such to believe it as yet). What would happen if R.N.Elliot came out from his grave and told that the entire thing was a hoax? This isn't possible with some time series or oscillators or any method which can be tested because we have questioned their effectiveness in and out.

How can you say "Hindsight bias" ,those entries are documented here in this forum with date & time stamps (to verify intraday chart's price at that time) of those posts & on those dates the wave count & formation may be noted plz.
Even my loss trades are also having date & time stamp.(Those win/loss i revealed)

Sir, humans as such are very biased species. We are prone to more bias than we actually believe. I still believe a few trades does not validate the theory (alas, who am I to?).

Just a quote (which has nothing to do with EWs)
"Prediction of the future involves predicting technological inventions that take place in the future. But if you can predict inventions, you have those inventions now, which would make your prediction of inventions (or future) a false one".

 

[kkseal]

The problem with a highly subjective methodology is that the chances of error is very high. What if one miscounts the waves or misjudges the wave position? (And this in a scenario where even the experts, the vastly experienced practitioners of EW are in disagreement most of the time)

Even more important is the consistency factor. An efficient method is one which produces consistently positive results, a consistent win/loss ratio over a period of time (& not an once-in-a-while flash-in-the-pan). Also, once implemented, it should actually make your job easier - not strain your neck & rack your brains to catch every little price move.

Having said that, a means of capturing the mkt cycles should be part & parcel of every trader's (even investor's) repertoire. I'd like one that's reliable & non-discretionary. Anybody knows/makes use of DeMarks methods?

Regards,
Kalyan.

 

[kkseal]

Just a quote (which has nothing to do with EWs)
"Prediction of the future involves predicting technological inventions that take place in the future. But if you can predict inventions, you have those inventions now, which would make your prediction of inventions (or future) a false one".

Why just 'technological inventions'? What about economic developments, political developments?

I would say prediction is not the same as anticipation in that the former is absolute, a certainty while the latter a probability. If today i say that the economic developments of the world will depend less & less on the US in future and new pillars of global economy would emerge in Asia, Europe & elsewhere - this would be a valid anticipation of the future based on present (& emerging) realities but still not a certainty, & therefore not a prediction.

Any good methodology of thought, of practice should only be seen as a better, more objective & reliable means of anticipation - prediction is better left to astrologers!

Regards,
Kalyan.

 

[oxusmorouz]

Why just 'technological inventions'? What about economic developments, political developments?

I would say prediction is not the same as anticipation in that the former is absolute, a certainty while the latter a probability. If today i say that the economic developments of the world will depend less & less on the US in future and new pillars of global economy would emerge in Asia, Europe & elsewhere - this would be a valid anticipation of the future based on present (& emerging) realities but still not a certainty, & therefore not a prediction.

Any good methodology of thought, of practice should only be seen as a better, more objective & reliable means of anticipation - prediction is better left to astrologers!

Regards,
Kalyan.

Obliged and I shall be careful with my lingo (though I presume people would have understood my point) .
Yes it appears to apply to everything from technological development to the butterfly effect.

 

[uasish]

"What is the Wave Principle?

The Wave Principle is a detailed description of how groups of people
behave. It reveals that mass psychology swings from pessimism to
optimism and back in a natural sequence, creating specific and
measurable patterns.

One of the easiest places to see this phenomenon at work is in the
financial markets, where changing investor psychology is recorded
in the form of price movements. If you can identify repeating
patterns in prices, and figure out where in those repeating patterns
we are today, then you can predict where we are going in the future.

The Elliott Wave Principle is named for its discoverer,
Ralph Nelson Elliott. Mr. Elliott completed the bulk of his work
on the Principle in the 1930s and 1940s.

" ... With proper study, and a good trading plan, you will know
very quickly how correct your wave count is, and be able to adjust
your position to maximize your trading rewards.


How will it help me invest?

Using Elliott waves is an exercise in probability. An Elliottician is
someone who is able to identify the market structure and anticipate the
most likely next move based on our position within the structure. By
knowing the wave patterns, you’ll know what the market is likely to do
next and (sometimes most importantly) what it will not do next. By
using the Wave Principle, you can be sure of the highest probable moves
with the least risk.


Applying Elliott Wave Theory Profitably
by Steven W. Poser (Author)

http://www.amazon.com/gp/product/0471420077/ref=sip_pdp_dp_0/102-0153392-0068935


Conclusion :

Elliott wave theory is a common type of technical analysis used by investors.
Technical analysis involves searching for predictable and recurring trends in
stock prices; being able to predict a stock trend would lead to profits. Other
commonly used methods of technical analysis are the Dow Theory and Kondratieff waves.
The basic idea behind Elliott waves is that stock prices can be described by a
series of long-term and short-term cycles. Ralph Nelson Elliott contended in the
1930s that the sociological behavior of investors could be used to model stock
prices. Each pattern consists of 8 total waves (5 'impulse' waves which move with
the general trend and 3 'corrective' waves which move against the general trend).
Within each of these waves lies another set of 8 waves (again, 5 impulsive,
3 corrective). Within these smaller waves lies another set of 8 waves
(kind of miniature versions of the larger set). Basically, the waves are superimposed
on top of each other, following a Fibonacci sequence. For most analysts, the smallest
waves are of little importance (since they generally do not affect price as much),
so the focus becomes identifying the larger waves (which have the
names Grand Supercycle, Supercycle, etc).
The practical goal of wave theory (or any financial theory) is to make money.
No matter if you believe in efficient markets, chart analysis or waves, the idea
is the same: buy low and sell high. Elliott Wave analysis tries to identify market
lows (for buying) and highs (for selling).
Here's my two cents (take this with a caveat since I am from the bastion of
efficient markets & Counter-Trend). If wave theory was indeed correct,
why isn't everyone doing it? and why isn't everyone exploiting these patterns
(are we all stupid or irrational?) Additionally, hindsight is 20-20:
it's difficult to predict when the next wave will occur (this is where money is made),
but easy to spot a wave after it has happened.

EW & Fractals:

http://www.lbma.org.uk/publications/alchemist/alch40_elliott.pdf"

 

[oxusmorouz]

You must not mistake my current post. It is purely for the purpose of questioning and I mean no harm.

Conclusion: Magical bangles bring positive effects.

Backed by narrative fallacy: These magical bangles transmit electromagnetic waves which enable you to improve concentration. These emit certain vibrations which alter the brain cells and thus improving your image and respect in the society. Evidence of this can be got from, Mr.ABC (and many others who have fallen prey to this gimmick)

Proof - an interview with Mr.Abc : "You see, before I started using these bangles, everyone in the society looked down upon me. Even my dog did not respect me. I don't know if it was magic or something but it really worked. I think more and more people should be given the oppurtunity to explore these bangles and benefit from it."

x--------------------------------------------------------------------x

Conclusion: Elliot waves work.

Backed by Narrative fallacy : (?)

"What is the Wave Principle?

The Wave Principle is a detailed description of how groups of people
behave. It reveals that mass psychology swings from pessimism to
optimism and back in a natural sequence, creating specific and
measurable patterns.

One of the easiest places to see this phenomenon at work is in the
financial markets, where changing investor psychology is recorded
in the form of price movements. If you can identify repeating
patterns in prices, and figure out where in those repeating patterns
we are today, then you can predict where we are going in the future.

The Elliott Wave Principle is named for its discoverer,
Ralph Nelson Elliott. Mr. Elliott completed the bulk of his work
on the Principle in the 1930s and 1940s.

" ... With proper study, and a good trading plan, you will know
very quickly how correct your wave count is, and be able to adjust
your position to maximize your trading rewards.


How will it help me invest?

Using Elliott waves is an exercise in probability. An Elliottician is
someone who is able to identify the market structure and anticipate the
most likely next move based on our position within the structure. By
knowing the wave patterns, you’ll know what the market is likely to do
next and (sometimes most importantly) what it will not do next. By
using the Wave Principle, you can be sure of the highest probable moves
with the least risk.


Applying Elliott Wave Theory Profitably
by Steven W. Poser (Author)

http://www.amazon.com/gp/product/0471420077/ref=sip_pdp_dp_0/102-0153392-0068935


Conclusion :

Elliott wave theory is a common type of technical analysis used by investors.
Technical analysis involves searching for predictable and recurring trends in
stock prices; being able to predict a stock trend would lead to profits. Other
commonly used methods of technical analysis are the Dow Theory and Kondratieff waves.
The basic idea behind Elliott waves is that stock prices can be described by a
series of long-term and short-term cycles. Ralph Nelson Elliott contended in the
1930s that the sociological behavior of investors could be used to model stock
prices. Each pattern consists of 8 total waves (5 'impulse' waves which move with
the general trend and 3 'corrective' waves which move against the general trend).
Within each of these waves lies another set of 8 waves (again, 5 impulsive,
3 corrective). Within these smaller waves lies another set of 8 waves
(kind of miniature versions of the larger set). Basically, the waves are superimposed
on top of each other, following a Fibonacci sequence. For most analysts, the smallest
waves are of little importance (since they generally do not affect price as much),
so the focus becomes identifying the larger waves (which have the
names Grand Supercycle, Supercycle, etc).
The practical goal of wave theory (or any financial theory) is to make money.
No matter if you believe in efficient markets, chart analysis or waves, the idea
is the same: buy low and sell high. Elliott Wave analysis tries to identify market
lows (for buying) and highs (for selling).
Here's my two cents (take this with a caveat since I am from the bastion of
efficient markets & Counter-Trend). If wave theory was indeed correct,
why isn't everyone doing it? and why isn't everyone exploiting these patterns
(are we all stupid or irrational?) Additionally, hindsight is 20-20:
it's difficult to predict when the next wave will occur (this is where money is made),
but easy to spot a wave after it has happened.

EW & Fractals:

http://www.lbma.org.uk/publications/alchemist/alch40_elliott.pdf"

x----------------------------------------------------------------------x

The first one doesn't seemingly make sense but the narrative statements which backs the wave theory is accepted by all without further questioning.
We have questioned the authority of Newton,Gallie and many others. Why then do we accept these magical waves without any empirical evidence?

 

[uasish]

Let us both be happy with our System.Mkt will correct us.With EW ,i feel comfortable to choose ,when offered a choice between 2 stocks for Buy/Sell.
Plz dont misunderstand that i want to be Right,mkt is always right.
However knowing this EW (a little bit) has helped me in choice making.
There are several threads on A.Get here ,many of my post there (since long ago) ,i was always expressing my belief that ,when MS gives me a Buy/Sell for more than 1 stock ,i always revert to EW for zeroing on the selection.
This is entirely my personal method which suits me .
If at all i could have coded those(EW principles) in MS then only ,an adverse report may alter my views,till then OK.
Open to be proved by backtesting that EW grossly fails,i would be 1st person to discard (like those bangels , fantastic example putten forward by you) EW & thank those who helped me,
because by all this argument ,you are actually trying to HELP me .(i will never misunderstand you.)

 

[bvpraveen]

Ridiculing without knowing is ignorance,even pleading ignorance do not spare us in court of law.

Exactly!

Although I'm not experienced to comment, most of them try to be against EW without even knowing - what it is, why it happens, relationship of waves with news, events, etc, etc...

The general norm is that, if one guy tells he can predict the market turn, even in lesser tone if he uses the word 'predict' somewhere, he will be questioned and bashed out.

Praveen.

 

[bvpraveen]

Just a small question,
To those who support EW, could you please back it up with some evidence as to its practical applicability?

As far as I learned since 2.5 months, some of the best examples for elliotticians who are successful are : Caldaro, amitt29, etc.

Look at Caldaro, it seems he's been using EW since two decades, thats 20 years. He revealed that EW has given enormous profit to him.

Even better example is our own friend - amitt29. I've chatted with him in old days, and I remember each and every chat moment I'd with him. He is another successful man.

Praveen.

 

[bvpraveen]

You must not mistake me but these are historical results from your data base of trades and are vulnerable to hindsight bias "after the fact". No one likes to reveal a loss making trade with waves or with any indicator/pattern.
By backtest, I mean something unbiased which people can reply upon...

Oxy,

The main reason for which EW is criticized, as far as I know is, one can't 'backtest' it using some charting software. Its not like any technical indicators like MACD, MA,etc where one can easily backtest and post the performance report.

Praveen.