Question:
What is your opinion of Elliott Wave Theory and Gann Theory? Are these methods useful for trading?
Fahad from Wonderland
Answer:
Fahad, let me answer your second question first. I don’t know, because I am a simple trader who does not go in for “theory” as it relates to markets. Markets represent our (traders) collective consciousness, which means they are subject to fickle behavior, which means accurate long-term and short-term market predictability is randomly successful. Having said this, I will now say general trends are more predictable, if the forecast is based on true market analysis, specifically, intermarket analysis.
As to your first question, I will give you some facts and you can draw your opinion, if you haven’t already done so.
William Gann was a trader in the early 1920s. He based his theoretical approach on ancient mathematics, geometry, numerology, and astrology, and he claimed his market-cycle theories derived from the Holy Bible. Specifically, Gann Theory states that specific geometric price patterns and angles have special properties that when analyzed can predict future prices. He believed and taught the “Law of Vibration” drives financial markets. This “law” predicts future market time and price with high accuracy. Gann also claimed that the “Rate of Vibration” of individual stocks and futures contracts determine the up and down of their prices.
Ralph Elliott, an accountant, developed his theoretical concept in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves. Elliott published his views of market behavior in the book The Wave Principle (1938), in a series of articles in Financial World magazine in 1939, and most fully in his final major work, Nature’s Laws – The Secret of the Universe (1946). Elliott argued that because humans are themselves rhythmical, their activities and decisions could be predicted in rhythms, as well. Critics argue that the Elliott wave principle is pseudoscientific and contradicts the efficient market hypothesis.
Predicting markets based on mathematical formulas, natural law, or human rhythm, is akin to predicting individual human behavior on the same basis. In theory, and in general, certain human behaviors are predictable in certain situations, but in the specific, one can never truly know how a single human being will react in a specific circumstance. The same is true for markets because human beings buy and sell them en masse. Remember, a theory is, well, a theory. To become fact, a theoretical outcome must be verifiable repeatedly. My thought is this: Those who trade based on these theories are no more successful than those who trade on Dow Theory, or any other theory for that matter. If they were more successful, every trader on the planet would base their trading on the predictions of these theories.
Trade in the day; invest in your life …
