Some Ramblings on Elliott Wave (Part 3)

Today I conclude a trader monologue heard a few years ago.

“I meet a lot of professional traders: futures, commodities, forex, large private investors, RIAs, market makers, pit traders, black-box programmers, etc. I always ask if they use Elliott Wave. I have always gotten the same basic response: ‘we look at them because other people look at them. Sometimes we look for levels of support and resistance at those levels, but we don’t trade off of them.’

I know there are people who claim success using Elliott Wave but sometimes things work for different reasons.

Jeff Augen did a dirty little trick once. He took random data (using lognormal scale) and presented the data to technicians. They worked their magic and drew their conclusions. He later told them it was all random. Reading that was a seminal moment for me. It really changed my perspective on technical analysis. Augen essentially believes it’s all hocus-pocus. I don’t go that far but I do believe it gets a lot more credit than it deserves.

So… what do I think? I put Elliott Wave much closer to astrology in terms of being able to predict future market movement.

By the way, I am Sagittarius with moon in Taurus and Venus was not in retrograde, which totally explains everything you need to know about me.”

Some Ramblings on Elliott Wave (Part 2)

In a previous post I began summarizing a trader monologue from a few years back. He continued:

“One of the best-known Elliott Wave practitioners is Robert Prechter. Go here to see who has the worst track record of the entire bunch. 23% accuracy! He was right: just early…

The [lack of] evidence doesn’t stop the faithful, however. When the market pulls back, they jump out of the woodwork: ‘AHA! SEE, I TOLD YOU THE MARKET WAS GOING TO PULL BACK! JUST LIKE THE ELLIOTT WAVES PREDICTED.’

I have a prediction. The market is going to go down for a while and then it is going to go up… and then it’s going to go down. AHA!

I consider Elliott Wave theory as a religion. Despite rational thinking and evidence to the contrary, ‘you gotta have faith’ to believe. When an Elliottician arrives at a conclusion using irrational thought, it’s impossible to use rational thought to talk them out of it.

In order for Elliott Wave to work there has to be a behavior that is governed by some set of rules. Elliott believed that traders would exhibit certain behaviors due to psychology. This may have been true in the 1940s but the markets and rules have changed. The advent of electronic trading has brought about thousands of trading methodologies that could never have been conceived by Elliott.

If someone could explain to me WHY IT WORKS, then I might believe it. Scientists understand “why it works” in nature. “Human psychology” is not a plausible reason when things like the uptick rule, circuit breakers, high-frequency trading, black box trading, short squeezes, and delta-neutral portfolios exist in the market.

I do think there is something going on. Certain stocks will rise to certain levels and tend to fall to certain levels. You can look at a chart and understand what I am saying.

People want to believe there is something out there that holds the key to the universe: the Holy Grail, if you will. This may exist but it’s not the Elliott Wave…”

Some Ramblings on Elliott Wave (Part 1)

A couple years back, I listened to a trader talk about Elliott Wave analysis. I found the diatribe interesting enough to save as a potential blog idea.

“Once upon a time,” he began, “I was introduced to the Elliott Wave. I thought this could be the answer although neither my research nor money found anything reliable: only subjectivity.

The ‘Elliotticians’ suggest one might look at a stock and think ‘if it is going to pull back then it would probably drop to X and if it really dropped it would probably come down to Y and it if bounces back, then it would probably come up to Z. You look at a chart and you can sort of tell what looks reasonable. Those ranges tend to be close to Fibonacci retracements.

I really thought there might be something to this analysis. The Elliotticians are very convincing and they can, of course, pull up historical charts and show you exactly how this works. They just aren’t so great at predicting future moves [something common to a lot of technical analysis ‘gurus’]. A common term, when technical analysis errs, is ‘I was early.’ This means the stock went the other direction for a while. Eventually any prediction will come true, right? Almost any, at least.

What really got me interested was a guy from Down Under with an incredible track record. The evidence was astounding: almost too good to be true. It looked like a money-printing machine. It was really expensive, though. They wanted $10,000 just to access the software. It was quite tempting.

I decided to do a bit more research brought to you by Google! I found some dirty little secrets about the founder. First, he results were actually backtesting. Shockingly, he was right every time! It was uncanny. Second, a criminal penalty was assessed to this guy for being ‘disingenuous’ about the results. He is still out touting the magic of Elliott Waves in another country under a different company name. It’s the same basic stuff, though…”

Portfolio Considerations of a Trading Strategy (Part 8)

Over the last few posts, I’ve been making the point that portfolio considerations, or “money management,” is an integral component of trading system development. Without these details, a viable business plan cannot properly exist. I’ve suggested these details to be frequently overlooked because discussion of one’s personal wealth is very limited in Western culture.

Discussion of wealth is not suitable for strangers, friends, or even the closest of family (if that) in many cases. This leaves only one’s financial advisor or personal attorney as potential confidants.

Whenever discussion is taken out of the public domain and packed into isolation between a select few (or less), the medium suddenly becomes ripe for coercion and chicanery to proliferate.

Understanding this is why I encourage traders or anyone associated with Finance to watch the CNBC television series American Greed. Innocent people are repeatedly usurped by sketchy characters posing as investment advisors or lawyers who offer a cut of “special opportunities.” So often, the directive becomes something like:

“…but don’t tell anyone else. I’m making this special deal
available to only a select few. Give me your money and I’ll
invest it. You will receive monthly statements and be able to
track its growth. Just keep this between us.”

Because I hope to make loads of money, I heed your demands. If you can swear me to secrecy then you don’t have to worry about the authorities knocking down your door. You are free to steal my money and to find more victims.

Catastrophic loss in the stock market has a similar feel. The discussion is just between me and the market through my stock broker or brokerage. Things might be going fine for months to years as I receive monthly statements showing a steadily increasing account value. Suddenly a bear market hits and I’m stripped of much wealth.

I don’t even know what hit me. I am decimated.

Without meaning to be insensitive, I would argue the feeling to be comparable whether raped by the financial markets or by the neighborhood con-artist.