Probability and Elliott Wave Part Deux

After the stockmarket close each day, I either cycle 10+ miles as fast as I can, or I walk a mile down the street to 24 Hr. Fitness. Generally those are the times I get to think. I may get Padantic here, but I was thinking on today's walk that I haven't done an educational post in a while. For that I apologize :). 

A ways back, I posted a 'Probability Language' post, and in some regard this is a sequel, but no need to find the previous. I have no idea where it is. 

Many market participants consider markets a random walk. But Elliotticians and other technicians consider the market to have a structure, and that it is not random at all. An analyst can be wrong, but that's simply her failure to read the structure, not because the market does not have structure. Elliotticians however, raise that a bar. We suggest the market forms sentiment waves which like the waves created by pebble dropped in calm water, reverberate over time in a mathematical fashion. Some Elliotticians watch Elliott Wave in progress and see religious like overtones and deterministic implications, as if G_d's order is expressed in the market. And, I have at least one foot in this camp. 

When I speak of probabilities, to be honest, I am not just saying if the market does X, it probability will do Y. I may be saying one of the following: 

1. The structure is clear, so the likely target and support is X, Y, or Z. 

or

2. I believe I have a read on the structure, and am expressing what is most likely the structure, given the evidence, But I can be wrong in my read. 

or

3. The structure is not clear, and I am giving my best read but when nebulous probability is low. 

Now, in EW, we have some certainties. And example is that wave two cannot go lower than the start of one. And, for an impulse wave 4 cannot cross the price range of one. And with that, diagonals which allow the 4-1 cross, can only be in wave one, five, A, and B. Those are hard rules.

Avi in his work we now call Fibonacci Pinball, we have very reliable tools using fibs which give us another edge, which is why Elliott Wave Trader stands unique in our edge, but also our 'pickiness'. And example of this at work is when the proposed wave 1 extends past the .618 and .764 extension, you more than likely have an impulsive failure as that is the proportion of an ABC, not the start of a third. That's a VERY EARLY Warning. But it is still a probabilistic warning, as there are sometimes super extended thirds that start with a wave one of the third beyond the 1.0. They just are not the the most wise to rely on. 

My point here is to set you right on how this works. The work of analyst tough in this regard. We have to understand the certain rules in EW, and then the probability behind some structures that do not give any certainty. Finally, you have to learn the structures in your particular market, which is why you won't find me saying much in Mike's Forex room. I rely on Mike. But this is also why I look for WXY corrections in Bitcoin and I know no other analyst here and on the interwebs that does. 

Your task as a subscriber and aspiring trader is to start to weed through this language. Words like 'should, could, and ideally' are words chosen when I am seeking the most probable direction. If I use a phrase like 'this is what I need to see to expect a bottom', I am using a stronger statement that is born of my EW experience, my knowledge of Fibonacci Pinball, and my experience as a trader. You have a choice. Perhaps you love your coin and go against my take. But note how many times I said 'this is what I need to see a bottom' and the FACT that I HAVE NEVER called a bottom in this correction. Each time the market responded to my invitational 'IF' with failure. That is the EW and Fibonacci Pinball at work. 

If you have been a member for the full two years of this service's life, you know sometimes I 'insult' a chart. You know, 'This chart really sucks' I might say on the webinar. I am not trying to insult you as a member. I simply see a chart so bad, I just want to be crystal clear about my opinion. I have had too many subscribers say I was too bullish sounding when I didn't think I was bullish at all, and vice versa. The point is when it is clear, I better say it!. But guess what? Even then I can be wrong. But it is rare 

For an example, I'm going to pull out the LINK chart. This is a chart I have not traded. I do not like the long term structure, but now that I have clear bounds in this correction, I am personally ready to trade this fifth. That's because  have a structure to work with where I can manage and structure my risk. The issue with this chart is it starts with a three wave, abc for 'wave 1'. That's a warning. For you not familiar with Elliott Wave might say 'Ryan, that is the past' now it is strong. The problem is it has poor underpinnings. Remember, the Elliotician sees the market as waves instigated by the pebble. Future waves are bound to the past. I may well be wrong, but the opportunity cost of being wrong by no means make up for the risk of going against this read in all my experience. If you are a LINK trader, you tempt fate in my opinion, but you may win out. But I, knowing full well I may have a bad read, will simply say, most likely this fails in the future. I can show you at least a dozen charts with that same start in 2017 who did not survive our 2018 bear market. 

What's the bottom line in all this rant?

1. Be picky. Don't trade low probability if you have other options.

2. Note sometimes there is low probability on short time frames, while the zoomed out forest is solid. This is the fractal nature of EW. Sometimes this means passing on a tranche while you HODL for the long term. This is something you will need to learn to navigate. 

3. Probability can also affect position sizing more than the question to trade or not to trade, especially in light of #2. As I always say, novice traders chase edge. Experienced traders, at least most, know edge is limited, but trading for a skew* will put you on the long road to success.

*Skew is trading for more units of reward than units of risk. In my trade plan, I aim for 3:1 in cryptos.

Ryan Wilday hosts the Cryptocurrency Trading service on ElliottWaveTrader.net.