Sunday, March 24, 2013

Elliot Wave for Systematic Traders

I received an email from a price patterns follower  which says this:

"I hope you are doing good. I am about to start reading of the book
"Five Waves to Financial Freedom: Learn Elliott Wave Analysis" by
Ramki Ramakrishnan. I have always stayed from Fibbonacci and Elliot
waves because it just didn't make any logical sense to me, but I've
finally decided to at least have a good reading on the principle before
making a judgement.

I wanted to know your views on Elliot Waves. If you have some time
could please share your insights on your blog with regards to this

My Response:

The trader who wrote this email works mainly on price patterns which he has converted into automated systems. When a systematic trader wants to read Elliot Waves, it could mean one of the two things:

1. The trader has suddenly developed a thirst for knowledge of waves, OR

2. Indifferent market conditions has caused enough pain to switch from patterns to 'something better'.

My response is not a criticism of Elliot Waves. Far from it. Traders have any number of tools at their disposal. Each trader finds his or her method. Each method is unique to the trader. Elliot Waves are as good as Channel breakouts or the trading of new highs/lows.

My point is something else: Do not think that Elliot Waves will provide you with a drawdown free / loss free trading method. It will not. It has the same advantages and drawbacks as  any other trading methodology.

Therefore, understanding of Elliot Waves for the sake of acquiring knowledge is a very good idea. If the hidden desire is to get some new method, then the trader will be disappointed. He will also get diverted from his skills.

What do readers say?


Rajveer said...

It is surprising to learn that apart from fundamentals & technicals,stocks will move according to Waves. Are stocks doing some kind of a fashion show?
Rediculous. Always remember that whatever ever price we buy and sell is just a trade between you and fellow trader. Company and Waves has nothing to do with it.

Dinesh said...

Dear Sir,

My take is that no trading system can guarantee 100% success all the time. There may be more than one factor influencing the market at play, but the trick is to identify the one which eventually dominates. A trading system should be continuously improved / fine tuned, to take into account changes in the market/economy.

If a system has worked for a long time but not behaving favorably in the recent past, then one would be better off doing the root cause analysis and fix the issue.

“The Signal and the Noise” by Nate Silver seems to be a good book to guide on the issues around predictions. I have just started reading it and done around 50 pages out of 450 odd ones.

Disclosure – I am not in the market for a long time and have not successfully got to the bottom of its behavior.


Hari Sreekanth Upadrasta said...

I disagree with one of the comment above. When they say waves its nothing but waves of emotions/moods. Technical analysis is entirely derived on emotions. And on the emotions we try to manage and make some money.
Pardon me if wrong.

amarjeet said...

Implications for Technical Analysis and Trading Systems
When using technical analysis to design a trading system it should be remembered that a price pattern is not an ATM machine. Technical analysts focus on predicting the future using observations of the past. However it is more effective to see TA as simply a means to determine entry and exit points. At first glance you may think that attempting to predict the future and determining entry and exit points are the same thing, but altering the phrase you use to describe your objective brings about a profound psychological change on your part. Predicting the future via the use of past examples ultimately leads to your prediction being right or wrong. Not only do we humans hate to be wrong but we hate it even more when we stake money on it. Without going into too much detail about trading psychology (we’ll leave this for another article) almost any emotion whatsoever can have a negative bearing on your trading. Losing a trade (and money) will make you go back to your technical analysis book and library of price charts to find out what on earth went wrong. You will undoubtedly see that the pattern you used for your entry was slightly different (it always is, we have already touched on why) and therefore you could have entered differently or not at all. This is the first stage of doubting your edge which can lead to all sorts of problems. Now suppose your pattern was just an entry point: If you have set your risk and target based on solid money management then you have given yourself the opportunity to profit from the potential you have identified, nothing more, nothing less. Now you must wait for an exit signal or for your target/ risk threshold to be reached. In effect you are reacting to signals the market gives you or flowing with the market. You are participating and not anticipating. Therefore you cannot be right or wrong. Ego, fear and greed will not play a part in your decisions.

amarjeet said...

There is always a place for fundamental analysis in trading, even if this analysis is as basic as knowing when data will be released. In just the same way that technical traders react differently to the same price chart, fundamentalists will react differently to the same piece of news. Market reaction to fundamental news can be unpredictable and violent and the resultant price action will add another variable to the potential success of technical analysis.

amarjeet said...


Rakesh Shethia said...

Elliot wave also forms a part of Technical Analysis. Prices are "technically analysed" in terms of probabilities of a certain outcome. Probabilities inherently mean there is a possibility of going wrong. Hence the trade setup has to be such that you profit more when you profit, and loose less when you loose. Now, identifying the trade setup is common in all school of thoughts. Be it classical patterns or Elliot waves, its the setup, thats it. Elliot waves have some setup that provide good risk reward ratio - P.S. I am new to Elliot waves. You would be surprised to know that the classical H&S pattern is a classifiable (so to say) Elliot wave pattern. At the end of it, all boils down to labeling / branding the price patterns.

ANAS said...

respected Sir, its me again.

the chinese teach kung-fu in a very innovative style. anybody who has seen the movie "The Karate Kid" starring Jackie Chan will understand.

My opponent ( the market) has no danger from my 10,000 moves ( trading strategy) which I have practised only once.

but, my opponent ( the market) will face danger only in my ONE move ( trading strategy) which I have practised 10,000 times.

my point is that, even my best practised trading strategy may , at times fail to earn money for me. But, since its my best strategy, I should stick with it.

So, according to me, the trader should stick to the strategy in which s/he is best.

thank you.
Anas E. Batla.