# Book Review: Elliott Wave Principle

This is a review of the book Elliott Wave Principle: Key to Market Behavior by A. J. Frost and Robert R. Prechter, Jr. See my other book reviews on this list.

According to Wikipedia, Elliott Wave Principle is

“a form of technical analysis that investors use to forecast trends in the financial markets and other collective activities.”

In other words, it is a theory that uses the pattern of past prices to predict the future prices. R. N. Elliott asserted that the market prices form waves. They come in a 5-wave pattern followed by a 3-wave pattern that reverses the former. In the 5-wave pattern, waves 1, 3, 5 form the trend, while waves 2 and 4 correct it. In the 3-wave pattern that follows the previous 5-wave pattern, waves 1 and 3 reverse the previous trend, while wave 2 distracts. This book teaches you how to recognize the wave patterns and therefore predict where a stock or the market will go next based on where it currently is in the cycle.

Intuitively I can see where the theory came from. When you look at a stock chart, it does look like waves. It goes up, comes down a little, goes up again, comes down again, goes up again, on and on … I think of myself as a person of average intelligence but I must admit that this book makes my head spin. There are supposed to be small waves contained within large waves which are contained in even larger waves. They also have something to do with Fibonacci series, Golden Spiral, 1:0.618, and square root of 5. It reminds me of the mumbo jumbo in The Da Vinci Code.

Regardless whether the theory is right or wrong, this book certainly makes it very difficult to understand. I tried really hard wanting to understand how to use it so that I can see if it makes any sense, but I failed miserably. After reading it from cover to cover twice, I still can’t figure out according to this theory where the current stock market is in the wave patterns. I think it’s because the theory is intentionally vague. Wherever the market ends up going, it can be fit nicely into the theory.

Rating: 0 star, total waste of time. It causes harm if you base your investment decisions on it. Not worth the paper it’s printed on.

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