Stocks & Commodities V. 32:1 (8-9): Letters To S&C by Technical Analysis Inc.

Letters To S&C by Technical Analysis Inc.

ELLIOTT WAVE THEORY and 1-2-3 wave counts for swing trading

Editor,

I have followed Sylvain Vervoort’s series of articles in Stocks & Commodities this past year on his swing trading technique (“Indicator Rules For Swing Trading Strategies (IRSTS),” May– November 2013). I was wondering what he thinks of Elliott wave theory.

I have read A.J. Frost & Robert Prechter’s book Elliott Wave Principle (first published in 1985), in which they write that wave 1 always consists of five moves, as well as wave C, but in Stocks & Commodities, I’ve read about the possibility of having a wave C of three moves. How can Elliott wave theory be reliable if the original Elliott wave concepts are “modified” by new authors?

I must say, sometimes this theory seems to work, while other times it doesn’t. I think Elliott wave theory is good for stocks that are not too volatile and whose “waves” do not overlap too much. A difficult challenge in modern, computerized, and manipulated markets!

The 1-2-3 wave count described in Vervoort’s articles, compared to Elliott wave theory, is much easier to apply. Personally, I find that often, wave 3 retraces 1.618 times 1, at least in the examples I could analyze. But I prefer to think about an initial retracement of 100% of wave 1.

Nicolas

Author Sylvain Vervoort replies: I think Elliott wave theory is quite useful. But I think you should apply it mainly to an index for an idea of where the overall market is. Counting impulse waves is generally not too difficult, but corrections can be long and complicated. Moreover, nothing is perfect. You should always allow some margin for the rules. And don’t forget that the count is fractal; a single wave A on a daily chart will probably be an abc zigzag wave or a 12345 impulse wave on, for example, a 15-minute chart.