At some point after learning the basics of the Elliott Wave Principle, you've probably said to yourself -- let's try and count some waves. The Principle claims to work in any liquid, freely traded market, so let's see if it really does.
The first hurdle you probably encountered when you sat down in front of your computer and pulled up a chart was: Where do I start? From what point on this chart do I start the wave count? Simple. Most Elliotticians use the lowest low and the highest high as measurement points for identifying waves.
OK, you’ve found a starting point; now comes the next question: Do you count every wiggle in that chart, or just the major “bumps”? As one of EWI's senior instructors likes to say, “Everything that counts can be counted, but not everything that can be counted counts.” In other words, don’t force wave patterns onto a chart -- instead, look for clear five-wave impulses followed by three-wave corrections. (And remember that “fives and threes” appear in bull AND bear markets.)
Found a “five-three” structure? Great, but you’re not done yet -- does it satisfy all three Rules of Elliott?
- Wave 2 never retraces more than 100% of wave 1. If it does, it’s not a 1-2.
- Wave 3 is never shorter than wave 1 AND wave 5. If it is, it’s not a five-wave structure.
- Wave 4 never ends in the price territory of wave 1. If it does, it’s not a wave 4.
You may ask -- fine, I’m finding “fives and threes” all over the place, but what does that actually tell me? A lot. Five-wave impulses indicate the direction of the larger trend. In other words, look which way the impulse is pointing -- and you now know what the likely trend is in that timeframe.
Of course, counting waves in old charts is easier than in real time. You never know exactly what that pattern is until it's finished, so real-time analysis is all about probabilities. That means that sometimes (often?), you'll be left guessing if what you see is a 3-wave or a 5-wave structure. What do you then? Wait. Patterns always clear up eventually. Patience is a virtue, doubly so when it comes to trading. And if you make a mistake -- well, that's part of it. Here's how Bob Prechter puts it in his classic 1986 report, "What a Trader Really Needs to Be Successful":
"...my observation, after eleven years in the business, is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated. The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure."
Winning in the markets is tough; less than 10% of all traders win. They are the ones who realize that market forecasting is probabilistic, and that even a correct forecast is only half the battle. They shun "expert opinions" because they don't want to make their mistakes. Instead, winners build their own set of trade confirmations and make their own trading decisions. Only then can your mistakes become your own. And only then can you truly learn.
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