The Flaws of Elliott Wave Theory

It is almost embarrassing to see markets trend against Bob Prechter and his Elliott Wave International for so long, but they don't even consider the alternative. Gold/Silver, for example, have put them on wrong side of market for so many years. Not to mention the deflation call comes earlier than reality for decades. That brought up my thought, as the most popular market model, EWT has some serious flaws and limitations.

The first flaw is, EWT is generally correct as a behavioral technique, but the price movement in any financial market is multivariate function. besides sentiment, other variables like fundamental, technical, and structure is also as important in influencing the price. So it is basically wrong to use sentimental extreme to identify pivot high/low, that leads to more mistakes that correct calls. Of cause at the important juncture of market extreme reading in sentiment is apparent, but it is necessary not guaranteed.

The second flaw, which is directly associated with first one, is that EWT is tied up with Fibonacci sequence. A lot of studies argue that fibi is ineffective to provide retracement level. In a market that is only driven by sentiment, fibi might be a lot more effective but in real world, you better rely on other method to speculate where market is turning.

The third flaw, is that EWT can't distinguish degree of wave ahead of time. Because it is heavily relying on sentiment, it is difficult to define if a pivot is long term or short term bottom /top. You may not know immediately so you have to leave s lot of options open. Then a single chart can be interpreted in many different ways.

There are lot of invaluable points in EWT including patterns, contrary opinions, and personality of waves, etc. You can learn a lot by practicing EWT, but when comes to trading, it is difficult to apply and the user is easily trapping himself by labeling the wave from his own opinion, while not violating any wave principles. I know a lot of people made good money by only using this method, but it is not for everyone. especially for those who can't stand many many small losses in order to hit a big one. It is always a good weapon in trader's arsenal, but is not bread and butter for majority.