The ongoing cryptocurrency boom has pumped new life into technical analysis. Tons of fancy price predictions are being posted everywhere. Hell, even GOLDMAN SACHS is posting Elliott Wave predictions.

In this post I will answer the question “What is Elliott Wave theory?” and go over some of the basic mistakes traders make when applying Elliott Wave. I’ll also go over some Elliot Wave books, that could be interesting buys, for those that want to learn more.

So sit back and enjoy.

What is Elliott Wave Theory?

In the early 1900’s Ralph Elliott Nelson made the observation that the markets moved in repetitive motions. At the time this was highly controversial and still somewhat is today. Elliott stated that these repetitive motions are the product of human nature (emotions, herd mentality, group think, …) and psychology of the masses. He went over past market activity and was able to isolate 13 different patterns. More interestingly was that these patterns were fractal in nature and could be strung together to create a bigger pattern on a higher level. He then observed which patterns follows which patterns and came to the 5 waves impulsive + 3 waves corrective structure.

So basically, the markets move in waves, and these waves consist of smaller waves, kind of like nesting dolls. The only difference is that each wave has different characters, different types, different rules.

Elliot went quite deep with his theories and claimed that they not only could be used in the markets but also in other areas, for example he illustrated his wave-like theory of repetitive rises and falls with the darker and brighter ages in human history (the rise and fall of the roman empire, the dark ages, industrial revolution, etc.).

A good book that builds your elliott wave knowledge from the ground up is, ‘The elliott wave principle’ By Frost and Prechter. It teaches you the fundamentals and the theoretical background of elliott wave theory and is one of the best starting point for learning elliott wave. (links down below)

The Five Mistakes

MISTAKE 1: Elliott wave in low volume or small time frame

The whole hypothesis of Elliott Wave is that the masses produce predictable patterns through their actions. So lower time frames on low volume markets will make Elliot Wave useless because not enough people have made actions. This problem can be solved by increasing the time frame. A 5min time frame on your favourite altcoin wont cut it, but a 5min time frame can be used on bitcoin during higher volume periods. And in combination with other tools you might even bring it down to a 1min time frame.

MISTAKE 2: Insufficient knowledge

Most people seem to be under the impression that being able to count to five is enough to apply Elliott Wave correctly. Elliott Wave has many rules and exceptions, especially in corrective phases. Knowing the full Elliott Wave theory is crucial, because not knowing a certain rule can catch you off guard during your trading. Preparing for all possible situations is mandatory.

There are also many tools to confirm your wave count, such as channeling, measuring ratios and using indicators, for example RSI to confirm wave 5 and 3 or triangles.

The book ‘Mastering Elliott Wave’ By Glenn Neele made some interesting and useful contributions to Elliot Wave. Even though the first chapters of the book are quite hard to get through, the latter parts of the book contain many useful tips and tricks on how to apply Elliott Wave. (links down below)

MISTAKE 3: Trading everything

Most people try to trade every part of each wave. While it is possible, it is not recommended. Wave 2 and 4 are corrective structures. Corrective structures can take a myriad of different forms so it is hard to make predictions that give you useful trades, as well as classifying corrective structures can be a pain in the ass. Trading books recommend to only trade wave 3, 5 and C. A good book on this is ‘Visual Guide To: Elliott Wave Trading’ by Wayne Gorman and Jeffrey Kennedy. (links down below)

MISTAKE 4: Forgetting about higher timeframes

When a pattern on a higher time frame is finished, a sudden strong change of trend can occur. When you didn’t put a stop and suddenly the trade is not going your way, and halfway during this bad trade you need to figure out what is going on a higher time frame, it will catch you off guard and make you lose money. Therefore it always best to start your analysis from the biggest timeframe and work your way down.

MISTAKE 5: Spelling Elliott Incorrectly

Two L’s and two T’s.

Books and Links for those who want to know more

Goldman Sachs using Elliott Wave: https://www.zerohedge.com/news/2018-01-16/what-happens-bitcoin-next-here-goldmans-latest-outlook
https://cointelegraph.com/news/goldman-sachs-bitcoin-has-potential-to-drop-below-february-low-of-5922

Experienced Elliott Wave Traders:
https://www.tradingview.com/u/ew-forecast/
https://www.tradingview.com/u/Wave-Trader/ (not standard elliott wave)
https://elliottwave-forecast.com/ethusd/

Elliott Wave Books:

The Elliott Wave basics, starting point for Elliott Wave. Definite buy to start out.
https://www.amazon.com/Elliott-Wave-Principle-Market-Behavior/dp/0932750753/ref=sr_1_3?ie=UTF8&qid=1522098346&sr=8-3&keywords=the+elliot+wave+principle

An expansion on Elliott wave theory for more experienced wavers.
https://www.amazon.com/Mastering-Elliott-Wave-Presenting-Forecasting/dp/0930233441/ref=sr_1_1?s=books&ie=UTF8&qid=1522098467&sr=1-1&keywords=mastering+elliot+wave

Gives practical examples on how to trade Elliot Wave. Not worth the price but still an ok book in my opinion.
https://www.amazon.com/Visual-Guide-Elliott-Wave-Trading/dp/1118445600/ref=pd_bxgy_14_img_3?_encoding=UTF8&pd_rd_i=1118445600&pd_rd_r=93E2FKS1J1QGZ9FY9TG7&pd_rd_w=csfHJ&pd_rd_wg=PJ3yx&psc=1&refRID=93E2FKS1J1QGZ9FY9TG7

Have not read it myself, but this author has read many trading books of which I liked those that I read.
https://www.amazon.com/Mastering-Elliott-Wave-Principle-Elementary/dp/0470923539/ref=sr_1_1?s=books&ie=UTF8&qid=1522098710&sr=1-1&keywords=constance+brown+elliot+wave