*****

Excerpted from Prechter's Perspective, 2004

 

 

Robert Prechter: I believe that Elliott is accessible to the average investor. Two evenings with the book (Elliott Wave Principle by Frost & Prechter), and it's clear to most anyone.

 

 

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."

 

Until the probabilities of the various patterns and ratios can be quantified, applying the Wave Principle will retain many of the characteristics of a craft to be mastered not only by thinking but by doing. Webster's defines a craft as a "skill acquired by experience or study," a "systematic use of knowledge."

 

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.

 

 

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.

 

 

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 it requires a good deal of patience. 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. 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.

 

At times, the art must outweigh the science, because Elliott wave practitioners seem to reach exactly opposite conclusions about a given market. Or is it possible that the odds are just evenly split between an up outcome and down outcome?

Prechter: Neither. One shouldn’t confuse the fact that the practical application of the Wave Principle is an exercise in ranking probabilities with the idea that different opinions are equally valid. Two possible paths for the market are almost never equally likely. So, two opinions are almost never equally valid. If two possible paths are equally valid, then the analyst who pushes only one of them is in error anyway.

When two wave counts have opposite implications, other evidence [such as investor sentiment] is usually so one-sided that a clear preference can be discerned. Occasionally, the less probable scenario works out, of course; that is what the word “probable” means. However, this occasional outcome does not mean, even in retrospect, that the person who champions a less probable count is or was correct. He was wrong in doing so. A system that is right 70% of the time cannot work if you try to pick the times when you can outsmart it. If you really can outsmart it, then you should be able to alter the rules and guidelines accordingly and follow the revised system.

Are some analysts making things up as they go along?

Prechter: Not necessarily. They are usually just focusing on a count that by the guidelines should be given a lower probability than another one. From experience, I know that jammed counts rarely work. Twisted “interpretations” that sacrifice some crucial rule or guideline tend to crop up mostly during difficult market periods. Even Elliott did it once or twice, for that very reason. But they are always incorrect and are harmful to the reputation of the Wave Principle.

You’ve said the Wave Principle is relatively easy to understand. How about application?

Prechter: The basic idea is easy to understand. The intricacies can take a fair amount of time to learn. Once you’ve learned them, it becomes an easy step to recognize forms in the market. When you can recognize five wave moves, A-B-C corrections and Elliott triangles, a glance through your commodity charts will show definite buys and sells with no additional work whatsoever. It offers the best reward-for-the-effort-expended ratio I know.

On the other hand, you’ve also said that it is mastered by a relative few. Out of all investors, how many do you think the Elliott wave method is geared for?

Prechter: Only people who want to put in the extra effort. That’s frankly a very small group. I think everybody will find the idea of the Wave Principle fascinating. People who aren’t even in the market find it an interesting concept. But the people who should actually apply it are only the people who want to make the market a very large part of their lives. You can’t make money at something without working at it. The Wave Principle demands that much because the market demands that much. They are one and the same.

It’s deceptive — a construct that is simple and easy to understand, but because of the inherent uncertainty, it demands rigorous and disciplined application.

Prechter: Well, the rules of chess are simple, but winning the game is not so easy.