Nitty-Gritties of the Harmonic Elliott Wave theory that make it a superior trading tool.
This is the final part 3 of the article “The classic Elliott Wave theory is dead — Long Live the Modified and Better Elliott Wave theory!”.
In the previous two parts of this article I explained what an amazing discovery made R.N.Elliott when he noted that markets not only follow similar patterns but those patterns are also subdivided into fractals, similar patterns of smaller size.
The main challenge for Elliott was to identify the most common features of that repeating pattern in order to propose formal rules that would define that pattern and make possible to use that discovery in practical trading and investing. His method was to break down that pattern into major components, waves, label them and check if those waves follow specific relationship to each other. It may sound simple but it is always a challenge to describe a natural phenomenon in a pain language of formal rules.
Apparently Elliott intuitively liked the simple and elegant solution. He came up with a theory that waves 1, 3 and 5 inside the repeating five wave fractal have internal structure identical to the same five wave fractal (see the chart 1 below).
In the first part of this article I explained that this perfect theory demanded too much from imperfect markets. Then Elliott had to introduce a number of exceptions from the original rules to explain those “deviations”. And those numerous exceptions made the rules too vague and left too much for subjective interpretations.
Then in 1990s Ian Copsey, a veteran FX trader and analyst, proposed a simple change to the five wave fractal that became a game changer. He introduced a slightly modified five wave fractal ( see the chart 2 below) and developed a new set of rules and called that new version “the Harmonic Elliott Wave theory”.