What If Mom And Dad Disagree?

This morning, Arkady posted an important explanation as to what someone should consider when our analysts seem to disagree about a wave count.  And, I wanted to post what he said and add to it in an update to our entire membership.

His first point was to zoom out and look at the larger degree time scale.  Implicitly, it means that when you zoom out, you will likely see that there is agreement on a wave degree higher, but the smaller degree count may be about which they disagree.

His next point is that the specific chart may be at a point where a wave count is simply too variable to glean a solid interpretation. I have spoken about this ad nauseum of late.  In fact, I have mentioned many times that attempting to identify the specific path of a corrective structure early within that structure is akin to trying to throw Jello for distance.

Moreover, as I constantly refer to The Elliott Wave Principle for this proposition, I think it is worth reposting it again:

“Of course, there are often times when, despite a rigorous analysis, there is no clearly preferred interpretation.  At such times, you must wait until the count resolves itself.  When after a while the apparent jumble gets into a clearer picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.”

This commonly occurs during corrective structures within waves 2 and 4.  You see, corrective structures are quite variable in nature.  While we can often identify targets and turning points with a high degree of accuracy when dealing with standard impulsive structures, the corrective structures can take many different twists and turns that are not always foreseeable.  During these times, you will likely see disagreement among highly competent analysts.

Recently, we have had many new members join us.  And, our newer members are likely scratching their head at the complexity of the market during the time in which they have joined.  But, consider that having the forewarned knowledge that you are about to enter into a complex, whipsaw environment is quite valuable information.  It tells you that you should likely trade less, and reduce your position sizes if you are attempting to trade within that environment.

In fact, I have often noted that when the market transitions from a powerfully trending wave 3 into a wave 4, and many market participants are not prepared for this transition, they continue to assume that they are in a powerfully trending 3rd wave environment, and trade just as aggressively as they did before.  The lack of knowledge of entering a new market environment causes them to lose a lot of the profits they gained during the previous 3rd wave.  So, having knowledge of the context of the market is extremely important.  And, as I have said many times before, Elliott Wave analysis is the only analysis I have come across that provides you the larger context of the market.

Moreover, what Elliott Wave also offers is a plan for how you can react to changing market conditions.  While we have a primary analysis, we also have objective points at which the market tells us our primary analysis is not correct.  Most specifically, when we created the Fibonacci Pinball methodology of applying Elliott Wave analysis, we adopted an objective framework around the standard Elliott Wave analysis to provide us with objective points at which we recognize that our primary analysis is not correct and we must adjust.  And, it provides early warning of this potential.

While those new to Elliott Wave analysis sometimes see this as a weakness to the analysis methodology, I think it is one of its greatest strengths.  When you go into battle, you move forward with your main battle plan.  But, there is not a single successful general that has not had a contingency plan which he is ready to put in place at a moments notice when he recognizes that his main battle plan is not succeeding.  This is how we approach the market using our Fibonacci Pinball method of applying Elliott Wave analysis.  It allows you to stop out when the market suggests that our primary path is incorrect, and immediately move into our alternative path so that we retain on the correct side of the market the great majority of the time.

As Arkady appropriately noted, Frost and Prechter provide some insight into this perspective as well:

"What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines. Other interpretations are ordered accord­ingly. As a result, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on both the list of possibilities and the order of probabilities for various possible outcomes at any particular time. That order can usually be stated with certainty. Do not assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.

You can prepare yourself psychologically for such outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count." Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of using it correctly. In the event that the market violates the expected scenario, the alternate count puts the unexpected market action into perspective and immediately becomes your new preferred count. If you're thrown by your horse, it's useful to land right atop another."\

There is one final point I would like to make about a disagreement between highly qualified analysis. I believe that we have the best Elliotticians on the planet on our site, as they provide the most accurate of Elliott Wave counts, especially since they apply a more objective framework through Fibonacci Pinball, which is only applied here rigorously, as we created it.

When you take what I just said into consideration, and you have two highly qualified analysts providing you opposite expectations on the larger degree (as opposed to a smaller degree disagreement), that should suggest to you that the particular chart is not one you may want to be trading in an aggressive fashion.  So, there is clearly something which can be gleaned from the fact that two highly qualified analysts see different potentials from the same chart. 

Yet, most of the time, disagreement is only seen in the micro structure during a corrective move, and you must recognize this important distinction.  In this case, both analysts view the structure as being corrective, and simply disagree about the micro path of a variable segment of the market action.  This is not an issue, as you should have already been forewarned of us entering a corrective phase, and have adjusted accordingly as I mentioned about.

I hope this helps to clarify some points of confusion about what Elliott Wave analysis is, what it is intended to do, and what you should do if you see two highly qualified analysts on our site disagree.

Avi Gilburt is founder of ElliottWaveTrader.net.