Welcome to this video on Elliott Wave Theory analysis versus objective trend trading indicators. I traded Elliott Wave rules for a while a couple of years so I’m definitely not here to trash the Elliott Wave principle.
My opinion on it is that it started out with the observation on how markets tend to move seeing repetitive cycles of three impulse moves in or five impulse moves and then three corrective waves. Then using it as an indicator of future price predictions.
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ELLIOTT WAVE THEORY ANALYSIS
The market is a wild animal is like a tiger. It’s not like a purse puppy that you can tame. So the markets are going to do what they’re going to do and they don’t always follow the same patterns as the rules in Elliott Wave theory analysis.
Therefore the way that I count waves is very mathematical. Certainly there’s been people who have attempted to create objective measurements for Elliott Wave charts and I’ve seen them but still the way that I do this is the way that I prefer it. After experiencing many different types of approaches so here it is in basic number one when we define trend.
ELLIOTT WAVE RULES
For example you could have a higher high and higher low and some people define this is a trend that is not a trend that is not a trend. That is simply a complex retrace in an overall downtrend in the extended general direction of this market would be down in this case before the trend is down. So we need a time when we’re going to use a trend trading indicator. We need something that measures the long term move of the market and there is many good choices.
ELLIOTT WAVE PRINCIPLES
I just use a moving average the 50 period simple moving average, which is different than how Elliott Wave theory basics are calculated. It fits the definition of the term trend. It’s also a very commonly used moving average perhaps the most commonly moving average that there is and therefore there’s a self-fulfilling prophecy to it based on mass psychology.
This is similar to what’s taught in Elliott Wave theory books. We’ll get our little ABC patterns here. As the market puts in cycles now this down here is my cycle indicator. When you’re measuring cycles there’s two different things there’s cycles and there’s waves. So this indicator measures cycles but you have to measure cycles before you can measure waves.
ELLIOTT WAVE CHARTS
The other way the wave 3 has a lower low than wave one. And since this does not therefore it is a cycle a wave low. That’s the difference between this and Elliott Wave theory analysis. So every wave is a cycle but not every cycle is a wave. So waves define counting how.
This is why waves are so important in trends. It counts how far you are along in that trend. So I’m sure you’ve heard the term. The trend is your friend until the end. That’s instructing us on is to know how early or late you are in a trend you only want to trade early in the new trend because the leader of the trend goes it’s not your friend anymore because your enemy actually.
ELLIOTT WAVE THEORY BASICS
That’s when we start looking for reversal trades. The trend is your friend. All right now we have trend reversal trades you could have gotten in before this on a trend reversal trade etc.. But these are very very reliable. So let’s define where does Wave 3 come in. Now here’s another thing that people will tell you that I disagree with and it goes back to the higher high higher low higher high higher low thing.
OK higher highs are an oversimplification. So it’s not necessarily important. For example in fact it can be deceiving it can be a bearish pattern. So here we have lower lows. The way I just have to define a wave three is we take this and we’ll look at. Let me bring up my drawing a line here. I’ll take that low straight across in an order for this to be a wave 3.
ELLIOTT WAVE THEORY PREDICTIONS
Here we have this is the start of where we could start a week three. It ends up putting in its low here. Notice the cycle indicator stays down below the mid-range of the indicator this whole time. That’s something to understand about cycle cycles or not even they expand and the contract and sometimes they actually disappear.
If you’ve heard understood or studied cycle theory or Elliott Wave theory analysis in detail then you understand what I’m talking about. Again now here we put in a wave five now counting waves this way of your average of count is if we have five. But let me show you something else so we get a higher high here. Mainlines just a little bit off there but you get the idea. So we get a little higher high here. But where does it close it closes and opens and closes below the high of we have one, therefore we call it a failed three.
ELLIOTT WAVE INDICATOR
And that’s called a rejection of value in market profile theory. Saying that the prices went up here but it didn’t close up there. It’s really not bullish yet. In fact the market rejected these higher prices. Now that’s just temporary. Can turn around in fact it did turn around here. And another thing to look at is the range of the bars all these range all these bars here a very narrow range.
You’ve got a cycle indicator that’s mathematical. You’ve got a rules based on price structure that’s mathematical and everybody gets the exact same way of count. So this can actually be programmed into software and look at that we put in a field name and we’re put in a real line.
It just doesn’t in my opinion make much sense to try to impose or reduce a big trend down to five waves and then expand a little trends into five waves and really those two trends are very different things. Why not number them for what they are either long trends or short trends. And to put numbers on them so that we can identify whether we’re really in a new trend late in an old trend and make it all very objective so that we’re all seeing the same thing and there’s really no guesswork to it at all.
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BTW, if you’re interested in the indicator that I use personally for very precise entries and exits. I’m happy to share that with you. Just send me an email at Barry@TopDogTrading.com, and I’ll show you how to get access to that indicator.
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