Julia Child introduced us to Mastering the Art of French Cooking, and Bob Prechter has done the same for the Wave Principle. Anyone who has prepared French food or Elliott wave charts can tell you that they both take time and dedication. But the result is well worth the effort. In this excerpt from Prechter's Perspective (the useful and interesting book of questions the media have asked Bob Prechter over the years), Bob explains how it takes both a scientific and an artistic mind to grasp the concept and to use it while trading.
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What about the Wave Principle and the way in which you apply it to making money? Is it truly accessible to the average individual investor?
Bob Prechter: I believe that Elliott is accessible to the average investor. Two evenings with the book (
Elliott Wave Principle by Frost & Prechter), and it's clear to most anyone.
Is applying it an art or a science?
Bob Prechter: The study of the market must be, and is, a science, albeit one in its early stages of development, as most social sciences are. As Charles Collins [an Elliott wave proponent] often said, application of the Wave Principle is an objective discipline. For this reason, only rigorously honest interpretations can be accepted as valid. If you want your hopes or whims fulfilled regardless of the evidence, the market will punish you for that weakness. Take it from someone who had to figure that out the hard way. The worst interpreters of the theory are those who view it as an art to be "painted" with their own impulsive or imprecise "interpretations."
… That being said, it probably takes an artistic mind to do it well, because the market draws pictures, and you must decide if they are proportioned correctly enough to call them completed. There are types of minds that are rational yet unsuited for this task.
What do the people who "grasp" Elliott wave share?
Bob Prechter: A certain visual sense – an ability to recognize an overall pattern at a glance. This can prove to be difficult for a person limited to a step-by-step, building block way of thinking.
Want to Master the Wave Principle? You can learn from two of our master teachers, Wayne Gorman and Jeffrey Kennedy, at our specially designed trading seminar, How To Trade in a Fast-Moving Bear Market. They will be in Chicago, Atlanta and Las Vegas over the next month before taking off for Australia, Singapore and Hong Kong in the fall. And then comes Washington, D.C., Los Angeles, Vancouver and Toronto.
Click here to find out about some early-bird discounts.
What else?
Bob Prechter: What the analyst does is observe the market in real time and compare current conditions with all of Elliott's various patterns to decide which pattern is most likely in force. There are certain junctures that are extremely reliable in terms of identifying where the market is and where it's likely to go next, and much time when it is not as reliable. So it requires a good deal of patience. It also requires the ability to be decisive, because sometimes a pattern will clear up on a particular day, and you must act then or forfeit the opportunity the market has given you. It also requires objectivity and a little bit of humility. If you form an opinion that a week later turns out not to fit the objective evidence of the market, you have to change your mind.
You've said that the Wave Principle is relatively easy to understand. How about the application?
Bob Prechter: The basic idea is easy to understand. The intricacies can take a fair amount of time to learn. Once you've learned them, it becomes an easy sep to recognize forms in the market. When you can recognize five-wave moves, A-B-C corrections and Elliott triangles, a glance through your stock charts will show definite buys and sells with no additional work whatsoever. It offers the best reward-for-the-effort-expended ratio I know.
On the other hand, you've also said that it is mastered by a relative few. Out of all investors, how many do you think the Elliott wave method is geared for?
Bob Prechter: Only people who want to put in the extra effort. That's frankly a very small group. I think that everybody will find the idea of the Wave Principle fascinating. People who aren't even in the market find it an interesting concept. But the people who should actually apply it are only the people who want to make the market a very large part of their lives. You can't make money at something without working at it. The Wave Principle demands that much because the market demands that much. They are one and the same.
It's deceptive -- a construct that is simple and easy to understand, but because of the inherent uncertainty, it demands rigorous and disciplined application.
Bob Prechter: Well, the rules of chess are simple, but winning the game is not so easy.
Want to Master the Wave Principle? You can learn from two of our master teachers, Wayne Gorman and Jeffrey Kennedy, at our specially designed trading seminar, How To Trade in a Fast-Moving Bear Market. They will be in Chicago, Atlanta and Las Vegas over the next month before taking off for Australia, Singapore and Hong Kong in the fall. And then comes Washington, D.C., Los Angeles, Vancouver and Toronto.
Click here to find out about some early-bird discounts.