Trading with Elliott Wave, does it work?


Here’s good question that came in from a trader over the weekend.

hi john,

something that i’m currently puzzled by is elliot wave theory. there’s several analysts these days mapping this theory to the current down-trend in the markets. and, i have a bit of a hard time understanding exactly how these different “waves” or “sub-waves”are discerned — and moreover, when do you discern that the complete series has either started or ended.

lastly, how applicable is this theory really? should it be trusted?

best,

zak

Ahhhhh, Elliott Wave Theory. I have to admit this is not something I’ve gone deep into personally. I do know people who like to employ it – including the gentlemen who I consider in many ways my mentor – but it’s not something that ever locked in with me.

A little while back I was given a copy of Elliott Wave Principle. I am a voracious reader on a wide array of subjects. There aren’t too many books which give me trouble, but this one did. I think I got through the first chapter (a long one), but have yet to progress any further. I just couldn’t pick the thing up again to keep going. Eventually I probably will, though. I did find that first chapter to contain some interesting discussions of common charting patterns that are generally not viewed as EW patterns – like triangles and such.

I’ve been semi-familiar with Elliott Wave Theory since I first started working in the markets. For me – and I strongly emphasize the me part – I have a hard time coming to grips with it all. Waves within waves within waves – 5-waves, ABC waves, wave extensions. It always just seemed to be too much, and a great deal of it based in a very subjective initial starting point – meaning where do you start your count? That’s exactly what Zak asked. I try to keep things as simple as possible.

Like I said, though, I know people who swear by Elliott Wave, so I will never suggest it be rejected. Becoming a good trader is, in large part, about identifying the decision-making tools which best resonate with you. Elliott Wave is that for some people, but not for me.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • Jean Dodard

    I have been working with Elliott Wave for a short time now, and can tell you it is not easy. But if you stick wit hit it WILL pay dividends. I am currently using it to navigate the bear market and it is simply remarkable, almost unbelievable. I do agree that sometimes things are unclear, but if you follow the guide lines the subjective aspects of the method are essentially gone. This is the only method that I have used successfully to help me find the exact reversal in the market. I know when you first take a stab at it it is very, very daunting and down right confusing. But trading in general is hard, if the technique were easy, I would probably not have given it a shot. Keep trying its worth it. You will not be sorry.

    Jean

  • John Smith

    I’ve studied the Elliott Wave and it is not a get rich scheme. Its use is mainly on the Dow Jones Industrial Average and not individual stocks, they are to narrow and volatile to spot a wave. The Elliott Wave provides a good means of studying the market in hindsight, not in predicting it.