Don’t get taken for a ride on Elliott’s Waves

Philip Salter
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IN 1938, the former accountant Ralph Nelson Elliott wrote The Wave Principle. A year later, the magazine Financial World commissioned a series of articles, which spread his message to a wider audience. It was an idea with huge implications for predicting market movements, based on the premise 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 theory went out of fashion until his protege and champion, Merrill Lynch’s Robert Prechter, made it popular again in the 1970s, with A J Frost, in their classic work: The Elliott Wave Principle – The Key to Stock Market Profits.

Traders and investors use Elliott Waves to judge the movements of markets within different timeframes – from the multi-century grand supercycle, down to subminuettes, measured in minutes, and everything in between. No matter the level of analysis, the fundamental 5-3 pattern of the Elliott Wave remains constant (see graph). Traders and investors use past data to spot these patterns, trying to time the jump on board impulsive waves and predicting corrective waves. However, though the 5-3 pattern is an interesting observation, many traders and investors remain unconvinced by its predictive powers.

Michael Hewson of CMC Markets says the problem is that there is no starting point, making it impossible to know where we are in the cycle. While Malcolm Pryor of says: “In practice, there is a large element of subjectivity in interpreting wave structures, with for instance alternative counts often producing significantly different interpretations of likely future price movements.” This means traders “often call major turning points in the market a number of times before they occur, eventually proving correct” says Manoj Ladwa of ETX Capital. He adds: “Even a broken clock is correct twice a day.” And David Jones of IG finds it overcomplicated: “Plenty of technical analysis is subjective but this does take subjectivity to another level.”

Elliott’s own confidence in his intellectual prowess can be charted in his own progress from writing a book on Tea Room and Cafeteria Management to authoring the boldly titled Nature’s Law – The Secret of the Universe. Of course, as Jones says, as trading is all about making money, if it works for you “more power to your elbow.” However, Elliotticians aside, most traders and analysts agree that there are simpler, more flexible and better predictive technical tools on the market.