# Elliott wave: The probability behind trading

Elliott wave is a pattern-based forecasting tool. The Theory was developed in 1930 and it is known for the idea that the Market advances in 5 waves and pullback in 3 waves. The Theory explains that the trend is always in 5 waves, and the trader needs to buy/sell against the beginning of wave 1 to make profit.

In reality, Elliott wave Theory is just another tool to forecast the Market which by itself is not enough. At Elliot wave Forecast, we do understand the power of the probability and math. Every trader or a forecasting service is trying to forecast the future, which by no means is an easy task. But there’s a way to make the forecast more reliable than just using Elliott wave as the only tool. Through the history, the most powerful language is math. Mathematical equation such as 2+2=4 will not change regardless of the language or country, so there’s no subjectivity there.

At Elliott wave Forecast, we also base our forecast in sequences, which is a logical movement that the market follows. A sequence of 5-9-13 for example is impulsive while a sequence of 3-7-11 is corrective. We also use correlation as part of the forecasting process and we believe the Market as a whole needs to be in sync. We divided the Market in groups, and forecast the Market in sync. For example, we cannot forecast a bullish EURUSD and a bearish EURJPY. Neither can we forecast a bullish SPX and a bearish DAX.

As part of the forecasting process, we also included cycles which are related to the sequences and the correlation. This helps us understand the whole market and the main direction. Elliott wave is a Theory which helps us develop the system that we used. It is a language which allows us to describe the market and forecast it.

The Math is what matters the most, since at the end trading is a probability profession. Let’s agree on 1 thing that calling the future with 100% accuracy is not real and should not be expected. The trader needs to understand there will be losers in the daily trading, and there is no way to avoid them. Having said that, we need to understand the concept of applying the same set of rules to place the probability on your side.

As a trader, lets say you are going to trade with a very simple rule, choosing one trigger to place a buying order and another trigger to place a selling order. You will trade at the same time every single day and you are going to look for the same amount of points every single day and risk the same amount of points every single trade. You are going to imagine yourself at the top of a building and you look down to the corner street building at 10 A.M. every morning.

Now a buying trigger will be a blue car or a green car, a selling trigger will be a red car. If the green car passes first before the red car then you buy and vice versa. Like we say you are always going to gain 100 points in the win and you are going to risk 40 points in the loss. The probabilities say that because you are using the same criteria to buy/sell and risk you will be about 50/50 in winning and losing.

Now let’s say in ten trades you are going to win five and you are going to lose five. The five win will represent 500 points gain, and the five loss will represent 250 points loss which still gives you a net profit of 250. If you do the math correctly, you only need to win 3 trades to be close to the break even point. The law of probability probability says that you should be oscillating between 4 and 6 wins and that is almost a guarantee that you won’t be a losing trader. The message over here is that without using any technical / fundamental criteria to enter a trade, a trader can still be profitable. All the traders need to do is trading with the same concept, criteria, and with the support of the universal law of probability a trader can be successful. Elliott wave is good but it needs to be used with the right mathematical backup.