Can Elliott Waves Really Predict the Price of Bitcoin?

[BTC.sx]

Introduction to Elliott Waves

Elliott Waves are a technical analysis indicator to predict future price trends. The principles of Elliott Waves are founded on the belief that markets follow predictable sequences of optimism and pessimism.

The sequence of a bull market follows the below pattern. A bear market follows an exact opposite sequence. To learn how to apply Elliott Waves, watch this tutorial by DanV, a very popular Trading View bitcoin chartist.



In a market largely driven by psychology and speculation, one can expect Elliott Waves to be applicable to bitcoin. However, Elliott Wave theory was developed in the 1930s to predict stock prices — can it really be used to predict the price of an asset that would have been inconceivable to the creator of the theory?

This post will analyse the suitability of Elliott Waves for bitcoin traders wishing to get ahead of the market.

Statistical validity

In 2001 an eighteen month study was led by a programmer and market trader called Rich Sanwell. The aim of the study was to determine which patterns worked, and whether the overall principle of Elliott Waves could be proven to be accurate predictors of market trends.

The key findings were:

Elliott Wave, as a theory, was statistically sound. This means that market movements can be predicted using sequences of investor psychology.

However, in 65% of assets, Elliott Waves were deemed too unreliable to be used for trading predictions. Therefore, to be successful with Elliott Waves, a trader must find one of the 35% of assets that move according to patterns outline by the general principles of Elliott Waves.

Those assets likely to follow Elliott Wave sequences have lots of liquidity/volume and are clearly influenced by greed/fear cycles. The Dow Jones matches this criteria and has been famously predicted by Robert Pretcher with Elliot Waves:



Thus, a bitcoin trader considering using Elliott Waves must question whether or not bitcoin can be classified as ‘liquid’, and whether or not the price is driven by investor psychology.

Does bitcoin have enough liquidity for Elliott Wave analysis?

Unfortunately, no hard number has been set to define what level of liquidity is required for an asset to be predictable with Elliott Waves. However, Steven Poser, Vice President in the Strategic Analysis and Market Data Group at NYSE Euronex, writes in his Elliott Wave book:

"shares of companies that trade by appointment must be avoided… there must be a crowd for technical analysis to work properly."

According to this definition: yes, bitcoin does have sufficient liquidity to apply Elliott Waves and other technical analysis tools. An evidence of this liquidity is the ease and speed of opening/closing position on exchanges using BTC.sx.



Now one must consider the question of investor psychology.

Is bitcoin driven by greed/fear cycles?

The short answer to this is: mostly yes.

Bitcoin appears to go through periods of relative stability and then enter a phase of parabolic growth, followed by a sharp correction. This correction ends at a level higher than the pre-hype price, after which the cycle eventually begins again.

This is a textbook greed/fear cycle and a simple chart comparison shows a high degree of fit:





However, one must appreciate that the price of bitcoin is also influenced by mining difficulty and supply.

Despite this, investor psychology appears to have a much larger influence on bitcoin’s price.

Now that is established that, in theory, Elliott Waves can be used to predict bitcoin’s price, let’s take a look at whether this is possible in practice.

Has anyone accurately predicted bitcoin’s price with Elliott Waves?

Theory and practice are very different things. And only the latter will generate profits.

To assess the real-life returns traders have made from Elliott Waves, the only accessible data are Trading View charts. These allow traders to make predictions, and then chart the price movement against these predictions. Thus, greater accuracy should equate greater profits — assuming the chartist is honest about their prediction.

The most respected bitcoin trader on Trading View is DanV. DanV also happens to like Elliott Waves. Hence, if anyone can make a profit trading bitcoin with Elliott Waves, it is DanV.

But his past charts have mixed results:

https://www.tradingview.com/v/qm7cnu9V/



https://www.tradingview.com/v/7ssFMZmi/



https://www.tradingview.com/v/A1mFwkEG/



The price direction appears to be predicted accurately, but not speed of change or the duration of a wave. These predictions would mostly produce losses, with the occasional profit (assuming a trader traded at every wave).

Conclusion

In summary, it is possible to predict market trends with Elliott Waves for some assets. Although no formal study has been done, it is likely that bitcoin falls within the 35% of assets that can be analysed accurately with Elliott Waves.

However, Elliott Waves are a difficult concept to apply in practice. As a result of this, it remains very challenging to make a profit trading bitcoin with Elliott Waves alone.

Investopedia describes the difficulty of using Elliott Waves nicely:

"There is a standard joke shared by technical analysts that if you were to put twelve Elliott Wave practitioners in a room, they would fail to reach an agreement on wave count and the direction in which a stock is headed."

Written by Josh Blatchford, CMO of BTC.sx, a bitcoin trading platform that allows traders to execute trades on the order books of multiple exchanges, from a single account.

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[RyNinDaCleM]

Again, nice post!
Chart #2 by Dan is one that I would like to comment on. Elliot wave theory does not tell what the amplitude of a wave will be. That is down to the ability of the chartist to use other tools like Fibonacci. Even then, you only have "typical" results to expect and must use other means to determine when a wave is complete. EW gives you the direction and the structure to look for, Indicators/Fibo tell you when to exit.

[zoinky]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

[jertsy]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

[Silverspoon]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

A trader who dies broke is a ____ trader.
His failure to become rich could be explained by one or more of the following:
1. Him not believing in his own analytical methods, thus never using them.
2. Him not applying his own methods correctly, i.e. not fully understanding his own system.
3. ? ? ?

[Hunyadi]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

A trader who dies broke is a ____ trader.
His failure to become rich could be explained by one or more of the following:
1. Him not believing in his own analytical methods, thus never using them.
2. Him not applying his own methods correctly, i.e. not fully understanding his own system.
3. ? ? ?

He should have just HODL! 

[jertsy]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

A trader who dies broke is a ____ trader.
His failure to become rich could be explained by one or more of the following:
1. Him not believing in his own analytical methods, thus never using them.
2. Him not applying his own methods correctly, i.e. not fully understanding his own system.
3. ? ? ?

Where does it say Ralph Elliot die nearly broke? I had a look at various biographies but I could find nothing that said he died nearly broke.

[Brooker]

Re: Can Elliott Waves Really Predict the Price of Bitcoin?

No.

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

But this is different. If he was so good at predicting prices he surely would have been better off financially.

[RyNinDaCleM]

Re: Can Elliott Waves Really Predict the Price of Bitcoin?

No.

No, it can't predict the price. You are correct. But it can predict the direction with a reasonable amount of certainty.

[Silverspoon]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

A trader who dies broke is a ____ trader.
His failure to become rich could be explained by one or more of the following:
1. Him not believing in his own analytical methods, thus never using them.
2. Him not applying his own methods correctly, i.e. not fully understanding his own system.
3. ? ? ?

Where does it say Ralph Elliot die nearly broke? I had a look at various biographies but I could find nothing that said he died nearly broke.

"At a trading conference, Alex Elder made it a point to mention that R.N. Elliott died a relatively poor man. Kind of odd that someone who discovered the "key" to the financial markets didn't make a few bucks." - http://www.dailyfx.com/forex_forum/elliott-wave/24204-elliott-wave-trading-discussion-583.html

Far from a primary source, but if you're genuinely having trouble finding stuff, this should get you started

[bigtimespaghetti]

Great post. Interesting that Elliot potentially died a poor man.

[chesthing]

In determining whether bitcoin fits into the 35%, you aren't factoring in that bitcoin is unregulated and has been hugely manipulated by scammers - mt gox, e.g. This has had a bigger effect on the price chart than fear/greed in a normal market.

[bigtimespaghetti]

In determining whether bitcoin fits into the 35%, you aren't factoring in that bitcoin is unregulated and has been hugely manipulated by scammers - mt gox, e.g. This has had a bigger effect on the price chart than fear/greed in a normal market.

Wouldn't the market ultimately factor in these things though?

[jbrnt]

It is so easy to map out all the turning points after the crash. The theory is accurate, but is rather useless during the pump.

[Beyonce]

Nobody can predict bitcoin price
Only someone who know future can predict know bitcoin price

It's never going to stop people from trying though, or coming up with their own theories and charts. Charts are never good for trying to predict this sort of stuff. You need to factor in many other random external things.

[jertsy]

Didn't Ralph Elliot die nearly broke?

I'm all for EW, and DanV for that matter. Good guy. But nothing really can accurately predict a market perfectly.  I'm more of a firm believer in the efficient market hypothesis, with a mix of TA manipulation / herd mentality.  Which I guess in a sense is what EW is trying to figure out.  Hodgepodge IMHO, a broken clock is right twice a day kind of thing.

I like your closing quote, gotta remember that one.

The inventor of coca-cola died broke after selling the recipe for next to nothing. Coca-cola's not done too badly since then though.

A trader who dies broke is a ____ trader.
His failure to become rich could be explained by one or more of the following:
1. Him not believing in his own analytical methods, thus never using them.
2. Him not applying his own methods correctly, i.e. not fully understanding his own system.
3. ? ? ?

Where does it say Ralph Elliot die nearly broke? I had a look at various biographies but I could find nothing that said he died nearly broke.

"At a trading conference, Alex Elder made it a point to mention that R.N. Elliott died a relatively poor man. Kind of odd that someone who discovered the "key" to the financial markets didn't make a few bucks." - http://www.dailyfx.com/forex_forum/elliott-wave/24204-elliott-wave-trading-discussion-583.html

Far from a primary source, but if you're genuinely having trouble finding stuff, this should get you started

His Wikipedia biography says he published his last book in June, 1946, two years before he died. He must have been paid royalties from it before he died, so I doubt he was penniless. Perhaps he could have been richer though.

http://en.wikipedia.org/wiki/Ralph_Nelson_Elliott

In the early 1940s, Elliott expanded his theory to apply to all collective human behaviors. His final major work was his most comprehensive: Nature's Law–The Secret of the Universe published in June, 1946, two years before he died.

[Silverspoon]

His Wikipedia biography says he published his last book in June, 1946, two years before he died. He must have been paid royalties from it before he died, so I doubt he was penniless. Perhaps he could have been richer though.

Perhaps.  And maybe he was as proficient at contract law as he was at trading, and got zip for royalties?  The point's he didn't get rich trading.

[jertsy]

His Wikipedia biography says he published his last book in June, 1946, two years before he died. He must have been paid royalties from it before he died, so I doubt he was penniless. Perhaps he could have been richer though.

Perhaps.  And maybe he was as proficient at contract law as he was at trading, and got zip for royalties?  The point's he didn't get rich trading.

Don't you need to start with a lot more money to get rich trading the stock market than for trading bitcoin? I'm clueless about the stock market, but maybe he did not start off with enough capital to make him rich.

[Silverspoon]

In R.N. Elliott's days (born 1871), there was virtually no entry barrier to trading, that's how so many ordinary people got owned in the '29 stock market crash & after which all the securities regulations happened.  The market could only go up, as far as investment enthusiasts of the day were concerned (should strike a chord with bitcoiners).  To my knowledge, he has never traded himself, but I'm not a R.N. Elliott scholar.
My point is only that R.N. Elliott didn't get rich by using his own system.  Why he didn't is anyone's guess.

[BTC.sx]

Again, nice post!
Chart #2 by Dan is one that I would like to comment on. Elliot wave theory does not tell what the amplitude of a wave will be. That is down to the ability of the chartist to use other tools like Fibonacci. Even then, you only have "typical" results to expect and must use other means to determine when a wave is complete. EW gives you the direction and the structure to look for, Indicators/Fibo tell you when to exit.

Great insight. We just might have to do a follow-up article explaining how to use EW and Fibo together...