Reader Question: Elliott Wave Theory?
I’ve long followed Elliott Wave Theory. What are your thoughts on it?
– KS
I get this question about EWT or technical analysis in general.
My take?
I put no faith in any trading method that involves drawing squiggly lines on charts.
Squiggly lines are inherently difficult to quantify and test, and I automatically assume that anything that can’t be quantified and tested is bunk.
Call it the geek in me, or better yet, call it the callous cynicism I’ve built after time and time again proving that the market’s “conventional wisdoms” aren’t all that wise. Trading on an idea that can’t be tested is tantamount to a leap of faith.
I’m not saying squiggly lines can’t be done well, only that I’m not willing to make that leap of faith with my own money.
Just my $0.02.
Happy Trading,
ms
P.S. the only person I know of who’s done extensive work to quantify and test TA patterns is Thomas Bulkowski. I can’t make a fair assessment of his work because I haven’t put the time in, but I would encourage interested folks to take a peek.
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Filed under: Random Stuff | 9 Comments
Elliot Wave theory is certainly interesting, and _in general_ I believe it can help traders get a better “qualitative” understanding of market movements and psychology.
But I’ve yet to meet a single person who’s actually made money trading it… and I guess that says it all. Nice as a curiosity to be considered (along with many other things), but dangerous as an ideology to be followed blindly.
There is another very good read about testing TA with statistical methods: Evidence-Based Technical Analysis by David Aronson.
Cheers,
Markus
Oh Elliot Wave definitely works – after all, here’s a chart with a clearly drawn A-B-C with the minor waves. And as you can see we’re clearly going up…uh, ok, we went down. Now, I’ve redrawn my waves here, so it’s really clear that the minor wave after the C wave was actually the B wave. So, we’re clearly going down. Ok, I kid the Elliot Wavers… :)
I’ve heard of people who try to test Elliot – never seen any definitive analytical answers…thus, I ignore.
I am personally not a great believer in EWT either, because it is really subjective. I was following Mish’s blog for a while and he kept re-drawing his waves and counts, or even suggesting several possible counts at once…
The fact that it is also often associated with Gann angles makes it even more esoteric (anybody thinking about the concept of using angles on a chart for more than 5 mins realises that it is completely dependent on the scale ratio of the chart!)…
However for those that are interested in investigating EWT further, while removing the subjectivity of it, I would suggest taking a look at Tom DeMark mechanized version of Elliot wave: the TD D-Wave, which is fairly well explained in Jason Perl’s book “DeMark Indicators”: http://www.amazon.com/exec/obidos/ASIN/1576603148/autotradblog-20
Tom DeMark has some fairly original ideas about Technical Analysis and his ideas provide an interesting new approach and twist to the standard TA litterature.
I have not tried to test his D-Waves (yet), but I am keen to test his “trademark” TD Sequential/Combo indicators as well as his mechanized version of the trendline TD Lines
Elliott Wave is crystal clear…in hindsight. Bob Pretcher is ranked dead last over the long-term by Hulbert.
I came to recommend David Aronson’s excellent book “Evidence-Based Technical Analysis”, and found that Markus had beaten me to it. So let me just add a strong second to him. I think everyone involved in quantitative market analysis should read the book, and learn 1) why the efficient market theory is bunk, 2) why traditional TA doesn’t work, and 3) what data-mining bias is, and how you can avoid it.
As Victor Niederhoffer said: “I can say without qualification that this book should be in every serious market practitioner’s collection”.
Finally, getting back to testing TA rules, here’s a quote from Aronson after he exhaustively tested 6,402 TA rules: “no rules with statistically significant returns were found”. And when he says statistically significant, he really means it, as he spends much of the book talking about how to make these determinations.
For a more detailed discussion of the book, see the following CXO Advisory web page:
http://www.cxoadvisory.com/blog/reviews/blog12-11-06/
Is that the same Niederhoffer that blew up in 1997 and in 2007? (and in 2017?..)
;-)
The book definitley looks interesting though.
I’ll probably get it soon – thanks! (too many books, not enough time!…)
Same guy. Smart dude, but he does have this one unfortunate habit….
Listed below is the type of relationship that intrigues Wavers. Elliott Wave was looking for a wave 2 rebound from the 1150 to 1074 drop. Fibonacci target levels would be 38.2% or 50% or 62.8%. As it turns out the snapback rally from 1074 to 1103 was right at 38.2%. The problem is that if one was waiting for a 50% or 68% retrace, then the rug just got pulled out from under them! I think this is the type of thing that makes EWT so frustrating and difficult to trade. Kevin
1150 – 1074 = 76 pts
76 x 38.2% = 29 pts
1074 + 29 = 1103 first target