It is understood by scientists now that price movements follow a statistical distribution called "truncated Levy flight." See for example this article,
http://ideas.repec.org/p/sfi/sfiwpa/9705087.html
Truncated Levy flight is a special kind of random walk, with variable step lengths. This is quite different from the usual random walk which produces the Gaussian distribution. In truncated Levy flight, there is no intrinsic length scale (time scale or price scale), so that price patterns over minutes would look very much the same as price patterns over days or weeks. This "self-similarity" is what EW theory tries to capture.
However, although it is not regular random walk, it is random walk nonetheless. Then how can one make money from it? This is a little complicated. Basically there is information flow.
It was shown by scientists that the stock market follows essentially the same scaling laws as turbulent flows (such as air bouncing off airplane wingtips). In turbulent flows the scaling laws are determined by energy dissipation, from the large length scale (meters) to the smallest length scale (micrometers, or even atoms). In a similar manner, the scaling laws in the stock market is determined by information flow between different time scales. Because there is always a time delay for information on the large time scale (a fund entering the market) to propagate to the small time scale (the scalper flipping the trade), if one intercepts that information flow (by whatever means) one can make money.
I would be surprised that EW can do that job. I think the trader's brain is doing that job, but because he has to think in EW language, he believes it's EW that's working.
BTW, there is no "market psychology" at all. All data points fall nicely on the truncated Levy flight curve.
http://ideas.repec.org/p/sfi/sfiwpa/9705087.html
Truncated Levy flight is a special kind of random walk, with variable step lengths. This is quite different from the usual random walk which produces the Gaussian distribution. In truncated Levy flight, there is no intrinsic length scale (time scale or price scale), so that price patterns over minutes would look very much the same as price patterns over days or weeks. This "self-similarity" is what EW theory tries to capture.
However, although it is not regular random walk, it is random walk nonetheless. Then how can one make money from it? This is a little complicated. Basically there is information flow.
It was shown by scientists that the stock market follows essentially the same scaling laws as turbulent flows (such as air bouncing off airplane wingtips). In turbulent flows the scaling laws are determined by energy dissipation, from the large length scale (meters) to the smallest length scale (micrometers, or even atoms). In a similar manner, the scaling laws in the stock market is determined by information flow between different time scales. Because there is always a time delay for information on the large time scale (a fund entering the market) to propagate to the small time scale (the scalper flipping the trade), if one intercepts that information flow (by whatever means) one can make money.
I would be surprised that EW can do that job. I think the trader's brain is doing that job, but because he has to think in EW language, he believes it's EW that's working.
BTW, there is no "market psychology" at all. All data points fall nicely on the truncated Levy flight curve.