Unlocking the Potential of Elliott Wave Theory: Invalidations and Alternates

by | Elliott Wave Articles

The correct way to use Elliott Wave is to always consider alternates, which is seen by many as trying to have a prediction in either direction and as such useless. But that view betrays a lack of understanding of how probability and Elliott Wave work.

To develop an Elliott Wave count requires a thorough knowledge of Elliott Wave rules and guidelines. To develop a viable alternate Elliott Wave count requires an understanding of the right look of a wave count and the probability of different Elliott Wave structures. For example, a running flat is extremely rare while a zigzag is the most common Elliott wave corrective structure.

One use of alternates is to judge an Elliott Wave count with more common structures as more likely and an alternate Elliott Wave count with less common or rare structures as less likely. Based upon probability of Elliott Wave structures, you can then judge the most likely next direction for price.

A second and very easy way to develop an alternate Elliott Wave count involves simply moving the degree of labelling up or down one degree within the most recent structure of the Elliott Wave count. By moving the degree down one degree, only part of the last structure may be complete versus the entire structure complete for the main wave count. A specific price point can then be identified where the alternate would be invalidated based upon Elliott Wave rules. For example, within a zigzag, if wave B moves beyond the start of wave A the Elliott Wave count is invalidated. Even if the alternate Elliott Wave count is wrong, it is still useful in judging probability of the main Elliott Wave count and in managing risk. When the alternate Elliott wave count is invalidated, it improves confidence in the main Elliott Wave count.

To use Elliott Wave with only one Elliott Wave count and not develop any alternates runs the risk of the one and only Elliott Wave count being wrong and the analyst left with no road map for future price if the Elliott Wave count is invalidated. Sometimes low probability outcomes do occur. Sometimes a more uncommon or rare Elliott Wave structure will occur, and when that happens it will never be the scenario judged to be most likely. That is how probability works. But the alternate must be developed in order for it to be useful if the main Elliott Wave count is invalidated.

Be wary of Elliott Wave work which never uses alternates. The Elliotician you are following may not understand Elliott wave deeply enough to know how to use alternates. They may also suffer from arrogance in believing their work to be absolutely right.

Second guessing your analysis, questioning “what if I’m wrong?” and knowing how to use alternate Elliott Wave counts is a sign of a more developed Elliottician.