Elliott Wave Theory was my first real fascination when I began dealing with financial markets. Shortly after market slump in 1994, I noticed that almost every wave on WIG chart (Warsaw Stock Index) was a pattern perfectly describing the entire crash lasting from March 1994 to April 1995.

Thanks to that, I managed to buy twice shares in the very low on the day when main index reached minimum. Such success could turn everyone’s head and I was no exception. For the next few years I was obsessively counting WIG waves and making predictions, which I was absolutely sure about. Whenever I had doubts or when someone had quoted arguments that were not Elliott’s theory, I came back to years 94-95 and convinced myself that such precision of wave matching and extraordinary accuracy of forecasts could not be accidental.

Unfortunately, later market never developed such clear patterns again. Gradually I abandoned Elliott’s theory and now I have a critical attitude towards it for several reasons:

Elliott’s theory is not a theory

It does not explain why financial markets would behave in one way or another, but rather refers to the undefined “law of nature”. As a skeptic I do not understand why market would just draw such kind of patterns. Why would the great masses of men for months or years make precise formations to predict change of trend with accuracy to within few days?

People are not so precise, and for sure big masses of people do not work in such an organized way. This can happen at a stadium in North Korea, where every spectator holds a colorful board so that the entire tribune looks like a screen where people are just pixels. This is possible because this “screen” is centrally controlled. Financial markets do not work that way, so I do not expect such levels of precision and predictability.

Markets are unpredictable

Secondly, I consider the market to be effective and, therefore, unpredictable. Situations that are foreseeable are rare and are exceptions to this rule. Therefore, if I use Elliott’s theory, then only if some structure can be unequivocally classified and confirmed by other techniques such as momentum or classical formations.

Thirdly, the Elliott theory rules are very stretched and imprecise, and thus allow you to mark almost every piece of quotation in many different ways. Therefore, in practice it is not possible to scientifically validate its effectiveness.

Why then do I use Elliott’s theory? For example, although rarely, there are situations where the chart looks like a five-wave impulse or triple-wave correction and does not give field to an alternative interpretation. It has to be clear.

Elliott’s theory is also popular among investors, so knowing the popular wave signs can give you an insight into expectations of investors about the near future and the levels that they consider important.

Summarizing this short article – I believe that Elliott’s theory, except for rare exceptions, cannot be the basis of analysis, but merely an additional method.

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