Briefly stated, Elliott Wave is a technical indicator that purports to offer buy and sell signals. It appeals to the silly notion held by many investors that repeating wave patterns exist and counting them will make you money.
Elliott Wave systems and software make statements like:
- You can have mathematical models generate objective and precise wave counts.
- You can compare current markets with historical patterns to generate Elliott Wave counts.
- You can receive price projections showing the most likely price range that a wave will reach.
The Claim: You count the waves. Then once you have the waves counted you will be able to pick when to buy and sell stocks and futures.
The Truth: Basing your trading off subjective patterns has proven time and time again useless. You can find a pattern in anything if you stare at it long enough. Also, projecting a price into the future is baloney.
The Source: The big Elliott Wave guru for many years was Robert R. Prechter, Jr.. We are sure Bob Prechter is a nice man, but Elliott Wave is just not a viable trading strategy.
Elliott Wave might hold some academic interest if this is what “bakes your potatoes”, but in terms of a trading approach, forget it.
Why Elliott Wave Fails the Basic Tests of a Viable System
The five questions that define a complete trading system are particularly useful for evaluating Elliott Wave. How does the system determine what market to buy or sell? Wherever waves can be identified, which is everywhere if you look hard enough. How much to buy or sell? The wave count doesn’t specify position sizing. When to buy or sell? When the wave count indicates the start of a new wave. When to exit a losing position? Elliott Wave practitioners rarely have a defined stop because the wave count can always be “reinterpreted” when price moves against the position. When to exit a winning position? When the wave count signals the end of the move, which is identified after the fact.
The subjectivity problem is Elliott Wave’s terminal flaw. Two Elliott Wave practitioners analyzing the same chart will frequently produce different wave counts. This is not a minor calibration issue. It means the signal is not objectively defined. A signal that requires expert interpretation to apply is not a mechanical rule. It is a judgment call dressed in mathematical-looking notation. When the wave count is ambiguous, which is most of the time in real markets, the practitioner’s view about market direction determines the count rather than the count determining the view about direction. The “objective and precise wave counts” that Elliott Wave software promises are not objective. They are the most plausible rationalization of the practitioner’s existing directional view.
The price projection claim is the most damaging because it is the most specific. Elliott Wave practitioners generate price targets based on Fibonacci ratios applied to previous wave lengths. These projections feel precise: the market should reach 4,238 before reversing. The precision is false. There is no empirical basis for the claim that markets move to specific Fibonacci-derived price levels. They sometimes do, and those instances are remembered and cited. The instances where they do not are forgotten or explained away with alternative wave counts. This is the pattern-in-random-noise error that the Bavelas experiment documents: humans find patterns in noise and build elaborate frameworks to explain them.
The specific failure of Prechter’s Elliott Wave calls over the decades is documented: sustained market advances were consistently predicted to end, and when they continued, the wave counts were revised to accommodate the new data. A forecasting framework that can always be revised to fit new data is not a predictive framework. It is a narrative framework that describes the past in wave terminology without generating testable predictions about the future.
Frequently Asked Questions
What is the specific problem with subjective pattern recognition in trading?
Subjective patterns cannot produce objective signals. When two practitioners applying the same framework produce different signals from the same data, the framework is not producing signals. The practitioners are producing signals and attributing them to the framework. A trading approach that requires expert interpretation to apply cannot be tested objectively, cannot be replicated across practitioners, and cannot be evaluated for genuine edge. Elliott Wave fails all three tests.
Why is the price projection claim particularly problematic?
Because it provides false precision that creates overconfidence in the signal. A price projection of 4,238 feels more actionable than a vague statement that the market might go higher. But the precision of the projection has no empirical foundation. When Fibonacci-derived price targets are hit, they are remembered as evidence of the system’s validity. When they are missed, the wave count is revised. This selective memory produces the illusion of predictive power from a framework that has none.
What should a trader use instead of Elliott Wave for entry signals?
Price breakouts above defined lookback highs and lows provide objectively defined, mechanically testable entry signals that do not require expert interpretation, cannot be revised after the fact, and have documented positive expectation across multiple markets and decades. The same price breakout signal produces the same entry decision regardless of who applies it. That objectivity is the prerequisite for genuine system testing and the foundation of systematic trend following.
Trend Following Systems
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