What Technical Analysis and Elliott Wave Theory IS and IS NOT

[RyNinDaCleM]

Technical Analysis (TA) is NOT about prediction. TA is about probabilities. It is about the Analysis of price data.
The use of price data to determine the next probable move is not a new development. It has been used for many, many years. Said price data is used to calculate the indicators used by many technical analysts. These indicators don't predict the future, they indicate changing trends well before there is enough data to draw what most of you like to call arbitrary lines. They indicate momentum, force and strength in a trend. As these indicators change, they tell the next probable outcome. You know what? They can even give two (or more) possible outcomes.

Arepo was correct when he said the supply/demand can overtake TA. It means that a market can remain in overbought conditions and still rise further as well as it can remain in oversold conditions and continue to drop. This goes back to the old saying, "The market can remain irrational longer than you can stay solvent". It doesn't mean it's not a good time to take profits. At that point, the risk to reward goes out the window.

TA is NOT a perfect science, it is subjective, and the quality of the analysis is based on how well the analyst understands the data. Elliott Wave Theory is a perfect example of this. If I gave the same chart to 10 people who could count waves, likely they would come up with 10 different counts that are all valid at the time, however, many times it's one move that validates/invalidates a count. So until that move happens, your count can be correct. Same goes for triangles. There are a very specific set of rules for triangles. As long as those rules are adhered to, the lines can be redrawn indefinitely until it is invalidated.

Those who say Bitcoin is not like a Stock, Bond, Financial market, Tulips... etc. YOU ARE WRONG. Elliott Wave Theory is driven by the gain and loss of value of anything, and the psychological effect it has on you (the trader). The waves are actually explained with the effect behind each wave and why those waves happen the way they do.

There is a better explanation of the psychology, but I can't find it right now. I will update this when I do!

lucif does a splendid job at analysis. He may not always be right, but no one will ever be. He analyzes the data, like a scientist. He gives a hypothesis, like a scientist. If it's wrong, it's back to the drawing board. The point is, it's free (so get over it), it's his opinion (so get over it)!

This thread was inspired by those who hate on technical analysts, and TA in general.  Thanks!
I will add to this post as I think of other things.

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[myself]

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[johnblaze]

sounds legit, you really know your stuff
where do i wire the money?

[BitcoinAshley]

sounds legit, you really know your stuff
where do i wire the money?

His PayPal account 

Also, nice post, OP.

[Ichthyo]

Technical Analysis (TA) is NOT about prediction. TA is about probabilities. It is about the Analysis of price data.

Hey, come on, you are bending words here...

What is the point of any Analysis, and what is the point of determining any probabilities, if the final goal would not be to do predictions or draw any kind of conclusions for the future?

Why are you guys so utterly dishonest? You go through great lengths of building up methods, graphs, indicators and all that stuff. Everything of this kind aims at the purpose to create knowledge which is objective, reliable, indicative, relevant, verifiable and thus worth to share. You go through great pains to add a paint of seriousness and relevance. You (=the proponents of technical analysis) take on the attitude of teaching other people, of knowing and showing what is really going on, under the seemingly random surface.

And then you label your results as "subjective" and generally irrelevant -- which in this context means there is no point in publishing your results.


To use a metaphor: A guy who builds a canon, and then claims this has nothing to do with firing and destroying a target.


Thus: Either you guys have the balls to come up with something which is not subjective, and which can withstand a methodical verification, or otherwise just s.t.f.u.

[johnblaze]

but Ichthyo
he posted an image explaining it all!

[arepo]

excellent explanation, rynin! thanks for the write-up

[arepo]

Technical Analysis (TA) is NOT about prediction. TA is about probabilities. It is about the Analysis of price data.

Hey, come on, you are bending words here...

What is the point of any Analysis, and what is the point of determining any probabilities, if the final goal would not be to do predictions or draw any kind of conclusions for the future?

Why are you guys so utterly dishonest? You go through great lengths of building up methods, graphs, indicators and all that stuff. Everything of this kind aims at the purpose to create knowledge which is objective, reliable, indicative, relevant, verifiable and thus worth to share. You go through great pains to add a paint of seriousness and relevance. You (=the proponents of technical analysis) take on the attitude of teaching other people, of knowing and showing what is really going on, under the seemingly random surface.

And then you label your results as "subjective" and generally irrelevant -- which in this context means there is no point in publishing your results.


To use a metaphor: A guy who builds a canon, and then claims this has nothing to do with firing and destroying a target.


Thus: Either you guys have the balls to come up with something which is not subjective, and which can withstand a methodical verification, or otherwise just s.t.f.u.

do you rage at your weatherman, too, because he's not 100% accurate, yet reports on his projections every day?

[bitleif]

Technical Analysis (TA) is NOT about prediction. TA is about probabilities.

There is no difference. Probabilities are predictions of the future. Pure predictions are just a special case where you set the probability to 100%.

The only interesting question to ask about ANY theory is: is it FALSIFIABLE? Ie. does it make any predictions that you can check afterwards? For probability predictions, you can check with statistics over time.

If it is falsifiable, then it should have a track record to prove its merit. If it is not, then it is completely and utterly uninteresting in every way.

[bitleif]

do you rage at your weatherman, too, because he's not 100% accurate, yet reports on his projections every day?

Weathermen use statistics and track records. If they were wrong 80% of the time nobody would ever listen to them.

[Hawker]

Long ago, priests used to look at the entrails of chickens to help invest in the grain markets in Rome.  All kinds of strange patterns and shapes were documented and people bought and sold accordingly.

[ManBearPig]

I do believe in this concept but that it falls apart when you try to define which of the categories of wave we are in.

Statistically movement X may be more likely after movement Y than movement Z but we are talking about micro-movements, things get incredibly chaotic beyond a few trades.

[arne]

Interesting stuff RyN.

I think it's not only a valid model but also a kind of a self fulfilling prophecy. If enough people use the same stats and buy and sell accordingly, the predictions automatically come true...

It seems hard to determine the scale to look at though. Could you (or anyone else) take a recent graph and show the waves? That'd be awesome.

[myself]

Interesting stuff RyN.

I think it's not only a valid model but also a kind of a self fulfilling prophecy. If enough people use the same stats and buy and sell accordingly, the predictions automatically come true...

It seems hard to determine the scale to look at though. Could you (or anyone else) take a recent graph and show the waves? That'd be awesome.

I can do this and i invite you to put the labels

[waveaddict]

nice post Ryn

I'd like to add a bit more for those doubting the practicality of Elliott Wave (EW) because of all the variation and subjectivity.

When it comes to charting, EW helps one determine/navigate possibilities (as you stated). Keep in mind that these possibilities can be broken down into likely, unlikely, and impossible. A seasoned analyst can quickly narrow down these possibilities into just a few probable outcomes, along with a few outlying possibilities.

Now, when it comes to trading, EW is extremely useful for risk management because certain market outcomes are highly predictable if certain criteria hold. For example, when a triangle breaks up, a practical trader will buy, set a stop loss just below the last triangle wave-e low, and use pattern measurements or Elliott Wave price guidelines to determine an appropriate exit. That trader doesn't care about the fundamentals of that asset; instead, he cares only about trading the technical pattern in front of him. By doing so, this trader is eliminating emotion from this trading decision (we all now how emotional traders are the worst traders). In this example, the stop loss was set just below the triangle wave-e low because a move below that low would invalidate or complete (if the post-triangle thrust move went above the highest triangle lower high) the triangle possibility and subsequently limit that trader's loss if another Elliott Wave possibility called for a painful move lower. Apart from triangles, there are plenty of other low risk yet high reward areas to place stops that work off of Elliott wave rules and guidelines.

Apart from helping one safely open and close positions, Elliott wave, alongside other TA tools, helps one determine an appropriate amount of capital or leverage to allocate to a trade. For example, if bullish EW possibilities and their respective risk-reward factors for an asset far outweigh the bearish ones, it is usually safe to increase the amount of capital or leverage to that trade. In contrast, when EW possibilities and their respective risk-reward factors begin to decrease or reverse, it is usually appropriate to decrease and potentially abandon the amount of capital or leverage to that trade. By shifting one's capital or leverage in this way (along with using physical/mental stops and targets as explained in the previous paragraph), a trader can both profit from a trend and limit the amount of risk he holds once that trend reverses. Also, because Elliott Wave is made up of ever-expanding fractals/patterns, a trader's capital or leverage allocation is partially determined by what wave degree that trader prefers, whether its short, medium, or longer term.

Cheers!