This is a very interesting question I am asked every now and then, so I thought I would pen a response as an article.
First, many may not know this, but there are quite a few “name” investors who do use Elliott Wave analysis in their decision making. One of the most popular is Paul Tudor Jones of Tudor Investment Corporation. Jones was quoted as saying that "I attribute a lot of my success to Elliot Wave Theory. It allows one to create incredibly favorable risk reward opportunities"
Moreover, I can tell you that I have over 500 money manager clients, and most have provided us similar feedback as these:
“I see the best quants, strategists and technicians the street has and you and your group are amongst the absolute best. My trading desk is floored at turning levels you are able to provide.”
“No single thing (or even the summation of multiple other things) has enabled me to successfully manage portfolios and, perhaps more importantly, given me so much peace of mind w/ regard to the state of the market than this site and the incredible group of analysts and support team here. Thanks for all you guys do.”
“I was in the business and have traded for 30 years. Avi is simply one of the smartest people I've encountered. I've been a part of his site for almost 3 years and he along with a bunch of very smart peeir ople continue to analyze the markets with incredible results.”
"I've worked on the street for about 15yrs and the analysts here are better than most I've worked with. You guys balance the emotions with your thesis, and are extremely diligent in your process. It's been a pleasure and quite profitable following your work. Thank You!”
But, the main question is why don’t even more use it?
Well, first let’s start with the understanding that it takes a lot of detailed work and calculation in order to perform a proper Elliott Wave analysis. Moreover, it is a very complicated method to learn. So, the entry into this methodology is not easy and to perform a proper analysis is not easy. But, then, show me anything that is truly worthwhile that does not require an initial investment and hard work.
To this end, most of what I see being claimed as Elliott Wave analysis is nothing more than what I call “wave slapping.” This is when an analyst places numbers and letters on a chart based either upon the “look” of the chart, or to support their prior bias about market direction. Since I would classify most analysis presented as Elliott Wave analysis as such, resultingly, most analysis is rarely correct more than 50% of the time. And, this lends to the argument about Elliott Wave being too subjective in nature.
So, when investors follow this type of “analysis” and see how often it is wrong, they make the assumption that Elliott Wave really does not work, and are turned off.
Unfortunately, even some “famous” Elliottician’s have been guilty of allowing their bias to cloud their objectivity. This has led to many Elliott Wave counts I have seen which I would consider akin to scratching your right ear with your left hand by going over the top of your head. And, as many have noted, their analysis and track record certainly have left a lot to be desired.
For those that have followed our work through the years, you would know that we are strict adherents to the purity of the Elliott Wave analysis methodology. We analyze all the sub-waves of a structure to assure ourselves that we have come to the most accurate analysis possible of the larger structure. In other words, we do the detail work which is needed to increase the probability that our analysis will be correct.
Furthermore, we have created an objective framework for Elliott Wave analysis that we call Fibonacci Pinball. This addresses the argument about Elliott Wave analysis being too subjective.
Now, the last arguments I hear against Elliott Wave analysis deals with the use of if/then analysis and alternative wave counts.
A standard Elliott Wave analysis will present the analyst’s primary analysis, along with an alternative analysis if something occurs which invalidates the primary analysis. In this event, the person using the analysis has a “back-up” plan which he/she can place into effect as soon as the primary analysis is invalidated. Therefore, not only do you have a stop out point, you also know at that exact moment how you expect the market to react in that “alternative” scenario.
Whereas many complain that this is a weakness in Elliott Wave analysis, I view it as one of its major strengths. Think about it. Is it a negative or a positive to have a backup plan in place in case your primary plan goes awry? I think we all know the answer to this question.
And, the main reason we use if/then analysis is because there is no such thing as certainty in life. Therefore, we have to view markets from a perspective of probabilities rather than linear certainties. For this reason, all the analysis is viewed from an if/then perspective. Unfortunately, many investors are not able to think on this plane, so they dismiss the analysis outright.
At the end of the day, if one is able to consistently engage in objective Elliott Wave analysis, then you would likely feel the same as the money managers we quoted at the start of this article. It really opens your eyes to an entirely new and more accurate perspective of financial markets. Lastly, it puts the market into a much larger context which no other analysis methodology provides.