Elliott Wave Principle: Key To Market Behavior by A.J. Frost and Robert R. Prechter

Summary: The book that defines the Elliott Wave technical analysis method. The concepts presented in the book and the supposed confirmation of the principle by the example charts do not follow the principle of scientific method. Elliott Wave is not proved (nor disproved) to be useful for trading by the book although many people may be misled otherwise. I cannot recommend this book.

Review

This book is the book that gets me hooked on the concept of hidden natural structure exists within markets. Not just one single market but all markets we participated in. The idea is very sexy and that started my pursuit of a working trading model based on this principle. I do not consider my time wasted on this. It is a lesson learned so that I will never fall into traps like this in the future.

The book is organized into 2 parts. First part is the Elliott Wave Theory. Second part is applying the theory on historical data of stock and commodities markets for confirmation of the practicality of the theory. The theory is relatively complex comparing to most other price based analysis tools. The explanation in the book is not as clean cut as it should be if it were a scientific publication. The application of the theory gives us a sense that the theory works very well in so many cases, it makes you feel like it is the holy grail in trading.

But we have to ask a simple question first – does Elliott Wave work at all?

My take is that it does not work at all if it is applied without hintsight. It is a labelling system where the labels are defined after the fact, very similar to the economic terms like recession, depression, etc. that are defined after the fact. There is no such thing as wrong label or not applicable conditions with those economic terms and so is Elliott Wave. The Elliott Wave concept enforces all movements within a market to be labelled by the rules in the principle.

That is like after discovering something contrary to the theory, instead of the theory has to be put in doubt, the followers of Elliott Wave choose to discard the evidence. It is in complete contradiction to the accepted scientific method. In this sense, pure Elliott Wave followers is similar to what cult followers are.

Many people who claimed to have applied Elliott Wave successfully in trading actually extracted a small portion of the concept and use it in their analysis. That is no longer Elliott Wave. They can essentially switch those Elliott Wave concepts with some other simple technical analysis methods to obtain similar results. Well, I guess calling your trading techniques having some form of Elliott Wave components is useful in boosting your image.

I cannot recommend this book because it is like a disease that can cloud the judgement of a trader. Someone who has strong background in scientific research, or critical thinking skill, would be able to extract the more useful tools from the book without falling into the trap of analysis with hintsight.

If you do not trade, this book provides good talking points in social gathering.

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