Once you've become interested in the Elliott Wave Principle (five waves up, three waves down, at every degree of trend), you want to learn more about how you can use it yourself. But is it too complicated for the average investor who already has a non-financial career? In this excerpt from Prechter's Perspective – the useful and interesting book of questions and answers that Bob Prechter has done with the media over the years – Bob explains that it's accessible to anyone who takes a sincere interest and has a certain visual sense.
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Excerpted from Prechter's Perspective, re-issued 2004
Q.: What about the Wave Principle and the way in which you apply it to making money? Is it truly accessible to the average individual investor?
Bob Prechter: I believe that Elliott is accessible to the average investor. Two evenings with the book (Elliott Wave Principle -- Key to Market Behavior by Frost & Prechter), and it's clear to most anyone.
Q.: Is applying it an art or a science?
Bob Prechter: The study of the market must be, and is, a science, albeit one in its early stages of development, as most social sciences are. As Charles Collins [an Elliott wave proponent] often said, application of the Wave Principle is an objective discipline. For this reason, only rigorously honest interpretations can be accepted as valid. If you want your hopes or whims fulfilled regardless of the evidence, the market will punish you for that weakness. Take it from someone who had to figure that out the hard way. The worst interpreters of the theory are those who view it as an art to be "painted" with their own impulsive or imprecise "interpretations."
… That being said, it probably takes an artistic mind to do it well, because the market draws pictures, and you must decide if they are proportioned correctly enough to call them completed. There are types of minds that are rational yet unsuited for this task.
Q.: What do the people who "grasp" Elliott wave share?
Bob Prechter: A certain visual sense – an ability to recognize an overall pattern at a glance. This can prove to be difficult for a person limited to a step-by-step, building block way of thinking.
Q.: What else?
Bob Prechter: What the analyst does is observe the market in real time and compare current conditions with all of Elliott's various patterns to decide which pattern is most likely in force. There are certain junctures that are extremely reliable in terms of identifying where the market is and where it's likely to go next, and much time when it is not as reliable. So:
1. It requires a good deal of patience.
2. It also requires the ability to be decisive, because sometimes a pattern will clear up on a particular day, and you must act then or forfeit the opportunity the market has given you.
3. It also requires objectivity and a little bit of humility. If you form an opinion that a week later turns out not to fit the objective evidence of the market, you have to change your mind.
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