[ furlher fielp us create a perspective and to iriterpiet the charts, wo will create four classifications of wave size, the tiefinitions below are created, not so that one stic ks to scientific iriterf)rctation of Ihc above nunibers hut in oidei to have a common ground tor communication. We will communicate more through illustration than the written word. IJelow dre examples of different-sized waves. See. Illustration 1- .

A.) 1.0to2.0 ATR isaminiwavc. B.) 2.1 to 3.0 AIR is a small wave. C.) 3 to 4.0 ATR is a medium wave. D.) 4.1 and greater ATR is a big wave.

It is notour intention to calculate ATR all the time, it is not necessary. We are initially using ATR to mathematically illustrate wave sizes. Once the irJea is grasped, then convert it to an art by visually seeing different-sized waves.

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Illustration 1-8

Chapter Summary

Ones knowledge, beliefs and intentions create a perspective. This perspective goes far to helper hinder ones ability to 1 1 1 or analyze a chart. By understanding how waves interact, it will be possible to organize the waves into a logical order.

CHAPTER TWO

Why The Elliott Wave Theory Does Not Work

Traders such as R. N. Elliott, W. D. Cann and Or. L.Andrew, who are believed to have made millions of dollars trading the markets, acquired their unique perspectives after persistent analysis of the markets for many years. Subsequently, they developed tools to crystallize their perspectives (i.e., Elliott Wave Theory, Gann Lines and Andrews Meridian Line). Markets were their ruling passion, and each, after many years of research, acquired a unique understanding of market behavior. Therefore, to take their trading tools and to use them without their accompanying perspective of the markets often leads to frustration.

Simple proof thai perspective has to precede any trading tool is in the fact that people who have usc4i Gann Lines, the Andrews Meridian Line and the Elliott Wave Theory disagree as to the validity of these methods. We all have a different perception. Therefore what happens around a Gann Line, an Andrew Line or the Elliott Wave Theory is accordingly inte reed differently.

With experience comes what psychologists have termed the "ahaa" experience a breakthrough in perception. Relating this to stock or futures charts, it is an experience thai comes about when a chart makes greater sense. Creating a clearer understanding of iTOrket behavior is an objective of the Symmetry Wave Method.

Of all the tools available for analyzing a market, only the Symmetry Wave Method and the Elliott Wave Theory attempt to organize the markets. Ihese two methods appear to be similar, yet they are drastically different in their objectivity and aliility to organize a market, orto function as a trading tool. In this chapter the weaknesses of the Elliott Wave Theory will be explored. In Chapter 3, the Symmetry Wave Method will be explained in detail.

The Elliott Wave Theory states that a bull market fits into five wave patterns, three up and two intervening down waves. The five-wave-up pattern, then, is to be followed by a three-wave-down pattern. Therefore, the entire pattern is an eight-wave cycle (see Illustration 2-1).

Illustration 2-1

The weakness of the Elliott Wave I heory lies in its rigid rule of five up waves and three down waves. Due to the fact that markets have their own agendas and more often than not refuse to fit the fIve-up-and-three-down aile, the El liott Wave Theory has complex rules. This complexity causes inconsistency in wave count, hindsight adjustments, matching of unrelated magnitudes of waves, and complex wave extension. This is a problem of trying to fit a market into the Elliott Wave Theory.

There is no God-given rule that says a market has to develop in five waves and the correction has to be in three waves. When expectations are set the tendency is to ignore a wave, or to group a wave so as to make the wave count fit ones expectation.

Because the Elliott Wave Theory has major inadequacies, fourspecific weaknesses manifest themselves in real time trading.

1. Wave counts are complex and the variations of a wave count abound, leaving a trader with \dc.k of confidence.

2. Just as indicatorscan be curve-fit to price data based on hindsight, so can the Elliott Wave Counts be curve-fit to charts based on hindsight.

3. Of itself, the Elliott Wave Theory does not anticipate support and resistance prices. Therefore, it is not a trading tool in and of Itself but a fair tool for organizing a market.

4. Waves are skipped to make the market fit the Elliott Wave Theory.

Several illustrations follow to reinforce the above observations.

The Ellioa waveccunt of the DowJones.lndustrial Average.d!lustration 2x2) is presented here in the same manner as that used by the top Elliott Wave analysts.

(1)

illustration 2-2

DJIA Weekly Chart. Elliott Wave Count. Version 1.

1. Notice the (a) (b) (c) (d) (e) set of counts, and explore the lack of balance.

a. Between the counts (a) to (e) there are eight waves that are unaccounted for. 7 his often has to be done to fit a market to the Elliott Wave Theory.

b. Wave(e) is half the size of wave (c). If any wave can be ignored or matched randomly with another wave, there cannot be any foresight validity to the theory or method of analysis.

2, Retracement wave b at the end of the chart is higher than wave (1).

a. Is the "b" wave an extension wave?

b. Is it a retracement wave?

c. How far should we anticipate wave (2) to go down?

Because the Elliott Wave Theory lacks objectivity, it cannot answer these questions except with hindsight.

This second version of the Elliott Wave Count (Illustration 2-3) is substantially different, but also anticipates that this market will unfold differently. There are too many ifs and maybes. If this hapfens, dien maybe that, or if that happens, then expect this.. There is no concrete commitment. The market is either going up or down. A trading tool should anticipate not only the direction of the next move with better than 50% accuracy (after all, flippi ng a coin will give you 50% accuracy), but also it should anticipate an entry price with a favorable profit-to-risk ratio, preferably at least 2 to 1.

((A))

Illustration 2-3

DJIA Weekly Chart. Elliott Wave Count. Version 2. 2/5/90

As mentioned earlier, the Elliott Wave Theory has alternative counts which add to the insecurity as to which stage of development a market is in. The chart in Illustration 2-2 is confusing; it leaves 1 much unknown. Add to this an alternative count. Illustration 2 3, which is completely different, and ones sense of security and corifidence in the Elliott Wave Theory goes down.

Illustration 2-4 is a continuation of version one of the Elliott Wave Count from Illustration 2-2. As (he D)IA weekly chart continues to unfold eight weeks later, the counting of Elliott Wave version one changes drastically.

The inconsistencies of this version of counting waves arc as fellows:

1, Waves 11, 2, and 2 are similar in size, yet each one is assigned a different wave count.

a. Wave 4 is half the size of wave 2.

b. Wave IV is twice the size of wave II.

c. Wave 4 is half the size of wave 2.

d. Between wave (2) and wave <3), there were innumerable waves that could have been wave (3).

Again, waves seem to be randomly matched in order to curve-fit a theory to markets.

2. With the exception of one wave, every wave count has changed, proving that as the triarket was unfolding previous counts did not hcld up.andthe current count does not have validity in real time trading.

IV (4)

( ) ((4))

Illustration 2-4

DJIA Weekly Chart. Elliott Wave Count. Version 1. 4/2/90

! he next few charts that have Elliott Wave Counts are by a different Elliott Wave Theor expert. (The charts are from CQG. CQG provides data feed and various trading tpols forclient: use. CQC in no way judges the meiits of this or any analysis in this book.)

The next two Deutsche Mark weekly charts illustrate how the Elliott Wave count change-after only two months. Again, this indicates that the previous Elliott Wave count did not hav much validity (see Illustration 2-3A and 2-5B).