Dr. Alexander Elder has been among the more sought after trader coaches and teachers for the past several years. Also a popular author, Dr. Elder wrote the bestselling trading book, Trading for a Living: Psychology, Trading Tactics, Money Management, back in 1993 and has since written a number of other widely read trading books including, Come Into My Trading Room: A Complete Guide to Trading, Entries & Exits: Visits to 16 Trading Rooms, and, most recently, Sell and Sell Short.
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In addition to writing and his own trading, Dr. Elder conducts workshops and seminars for traders and clients around the world, as well as running annual Trader’s Camps and lecturing for leading financial institutions. His website, ww.Elder.com, features a schedule of upcoming camps and events such as his online webinars (including links to archived presentations), as well as more information about his firm, Financial Trading Seminars, Inc.
I spoke with Dr. Elder a few weeks ago by telephone. We talked about his widely read books on trading as well as the work he has done with traders over the years. We also discussed his broader thoughts on trading, on using technical indicators, the vital importance of record-keeping and how to develop what it takes to truly be one of the few souls who are actually trading for a living.
David Penn: You’ve been teaching and coaching traders for years. Do you see any characteristics or traits in common among most of these people who come to you to improve their trading?
Dr. Alexander Elder: Very much so. People go through stages and very often I can tell which stage they’re on simply by listening to the questions that they ask.
At stage one – I call it the Stage of Initial Ignorance – people think that if only they can get the moving average right, the money spigots will just open and money will just start pouring in. So at that point they are very technical.
People who survive the Stage of Initial Ignorance, they learn some technical analysis and then they begin to realize that even with all of the stochastics and moving averages, sometimes they win, sometimes they lose. They become much more aware of the importance of psychology. At that point they start paying attention to how their mind operates. This is the second stage.
And then finally, at the third stage of development, people realize that they have to control money, and that the money management is where it’s at. So depending on what kind of questions people are asking me, I can figure out for myself what stage they’re at. I always try to mark the next stage for them, where the next place to go is.
Penn: Interesting. And would you say those that you’ve dealt with who have become very successful are those that have mastered and made it through all three stages?
Dr. Elder: Yes of course. There is no way of getting ahead without mastering all three.
Penn: Your first book, the book that most people who are familiar with you have come to read was Trading for a Living. I’m curious, has the idea of trading for a living or the dream of trading for a living also in some ways become easier and in some ways harder than it was when you wrote the book?
Dr. Elder: The idea is certainly a doable idea. For many people it’s just a fantasy because to trade for a living, you have to do a tremendous amount of work and many people simply don’t have the discipline for something like that.
But of course the idea or the dream, if you will, is with us because it’s a nice lifestyle. You don’t have a boss. You can do it from anywhere in the world. I love trading this market from Europe because of the time difference. There is a sense of ease and freedom but, of course, behind all of that is a tremendous amount work, tremendous amount of discipline. You don’t have a boss. You have to be your own boss.
Penn: In terms of the people you’ve dealt with who’ve started out with that goal, would you say very few have made it? About half of those have made it? How hard has it been, of the people that you’ve actually worked with, that have made it to that point?
Dr. Elder: When I teach a conference, I usually say to people, you know, “Most people in this room are going to fail. I’m here to help those who are willing to learn, willing to listen.” It takes a certain personality to succeed. It takes somebody who is very focused, very determined, a lot of stick-to-it-ness.
Penn: Would you say that, and I’ve heard people argue it both ways on this, would you say that intelligence is a help, is a hindrance, or a 50/50 factor in terms of success as a trader?
Dr. Elder: If you go down to the floor, you meet the traders who are making a living as traders. Those guys are no intellectuals. Until a few years ago, you rarely met a college educated person on the floor. Now there are more of them. One does not need high formal intelligence.
For success, intelligence is not a hindrance, but not a great help. It’s just not a huge factor, as long as somebody has a reasonable level of intelligence. But what tends to be a hindrance to success is formal education.
There used to be a guy in Chicago, he died a few years ago, Brian Monieson, and he said in an interview, “I have a PhD in mathematics, specialized in cybernetics but I was able to overcome these disadvantages and make money.” I find that people with a lot of formal education tend to think that if only they study hard, if only they work hard enough, they’re going to be successful. And it’s not so.
You know, in medicine, which is where I’m coming from, every patient deserves a diagnosis. You have to figure out what’s wrong with this patient. So if you don’t know what’s wrong with this patient, you get more tests and a second opinion and this and that but eventually as a physician I know that every patient deserves a diagnosis and until the patient has a diagnosis, I haven’t finished my job.
But it doesn’t work that way in trading because if you’re looking at a stock, trying to decide to buy it or to sell it or stand aside, this analysis should not take a very long time. If you’re spending half an hour or an hour trying to decide, you’re basically wasting your time.
In the stock markets or the futures markets there is a very high level of uncertainty. And to be successful, you have to know how to live with uncertainty. This is something that education prevents people from doing.
A friend of mine spent most of his working life working in the oil patch and he said, “If I came to my supervisor and said to him, ‘Look, I designed a process to control the pumping station so eight times out of ten we’re going to have fantastic control and two times out of ten, the station’s gonna blow up.’ The manager would say you are crazy, go back to the drawing board.” But in trading, that’s what we have to live with. No matter how good are your signs, some trades are going to fail. So just be sure you organize your money management in such a way that you don’t blow up, so that you don’t get hurt badly. That’s basically the point of it; formal education is no big help. It’s more of a hindrance in this business.
Penn: Let’s move to the book that followed up Trading For a Living, Come Into My Trading Room. What did you want to accomplish in that book that maybe you didn’t discuss as much in the previous book?
Dr. Elder: The second book, Come Into My Trading Room, came out nine years after Trading For A Living so I had nine years of thinking, living, trading, reflecting and I realized that there was several important messages I wanted to put across.
On a technical level, I came up with this new way of analyzing markets which is called the Impulse System so I put that into the book. But much more important that than, much more important than anything else, I realized that the quality of record keeping was the single most important factor in a trader’s success or failure. And this book really shows how to set up your record keeping, how to design a trading system, how you record every step of your way, and how to become your own instructor, your own teacher.
I use Outlook to get my journal and I also keep an Excel spreadsheet for measuring the performance of my trades. And by the way, performance is not measured just in money. Performance of the account is measured in money but in the individual trade, there is a much better way to measure than money which is explained in the book and the book actually says, “Send me an email and I will send you the spreadsheet with instructions.” Now I’m getting several requests everyday so my assistant keeps sending out those spreadsheets.
Penn: Why is it that you think that people have not, in the past, understood the importance of record keeping? Do people just not think it was as important or did people really not want to know how well professionals, for example, have to keep track of what they’re doing?
Dr. Elder: Even professionals who have to keep track of what they’re doing in terms of account performance, don’t really keep good records of individual trades. Why? Because people like to dream. People like to think about wonderful and beautiful things that are supposed to happen to them. And once you start attaching numbers to them, it takes away some of that fun. So keeping records is boring. It takes time. It takes away from the pleasure. It’s so entry level to analyze the market put in a grade and then to spend 20 minutes recording the trade, ah, but you have to do it.
Penn: Let’s turn to Entries and Exits. It was interesting to see the different ways that traders put things together and then to read your commentary about these different traders and their different approaches. Tell us a little bit about your decision to write that kind of book compared to the other books.
Dr. Elder: My publisher came to me and wanted me to produce a book for them. I really didn’t have a book in me; I said everything I wanted to say in Come Into My Trading Room and I really did not have anything new. But they were pushing and pushing and asking and asking and I so I said, “You know what, I don’t have a book in me but I can certainly write a book about my friends. Let me go and interview these different traders and ask them to show me a trade.”
A very curious thing happened. I was going to have to have 30 to use on the book and I approached this friend of mine who’s a very successful multi-million dollar trader, and he said to me, “Alex, you gonna approach 30 people, each of them is going to give you one trade, of course they’re going to give you a winning trade and some poor beginner is going to pick up this book and say, ‘Wow, 30 trades, 30 winners, this must be easy.'” I said, “You know you’re absolutely right” and I just restructured the book from that day on. I asked everybody for two trades – a winning trade and losing trade. This book is fully illustrated with color charts, and it has two trades per person, a winning trade and a losing trade.
Penn: Looking after the book was finished, was there anything that you learned in the process of putting this book together that maybe surprised you or that you hadn’t expected?
Dr. Elder: Ah, several things. First of all, people often say: well what’s the common factor between these individuals. They keep fantastic records, all of them. The first interview in the book is this woman, Sherry Haskell, I interviewed her and then a year later I was in her area and I realized there was a gap in my interview so I figured I would have to do a new interview. I call her up and I went to her house since I was in the area and she checked her calendar, what was the date when we met, went to her filing cabinet pulled out the chart, and we continued the conversation which began a year ago like it was two hours ago. So the record quality is very good.
Penn: That’s exceptional.
Dr. Elder: These people tend to be eccentric. They don’t tend to be 9 to 5, jackets and tie kinds of people. And another thing that came as a big surprise to me was that most said, they loved their wives. Not everybody; one was in the middle of a nasty divorce. But by and large, these were people who really love their wives. They were happy at home. They had no stress when they were at home. They had plenty of that in the markets. Their home life was surprisingly nice. And they wanted to talk about it, not just casually, as if to say “Oh my life is okay,” but they really wanted to talk about that. That was a big surprise to me.
Penn: Now as a psychiatrist, I’d imagine that must have really caught your attention.
Dr. Elder: It caught my attention, but not right away because I completely did not expect this to happen. It was one of those unexpected findings.
Penn: Would you say that that was a major factor in their success that they could have all their stress in the market and go home and everything was relatively calm, if not happy?
Dr. Elder: Not just calm but very, very positive.
Penn: Let’s take a look at Sell and Sell Short Could you tell us a little bit about why you decided to write a book on this particular topic?
Dr. Elder: I was having dinner with my publisher who was asking me what topics are underserved in the trading literature and I mentioned there were tons of books on buying; buy this, buy that, buy everything under the sun but there’s really not a good book on selling. There hasn’t been a good book since 1970s. So he got all interested and he says, “So who do you think could write a book like that?” I said, “Well, I guess I could.” And from that point going forward, my life got taken over for a year.
Penn: You’d said that this topic was underserved in terms of books.. Why do you think that’s been the case; that people have avoided talking about selling?
Dr. Elder: It’s fun getting into a trade. It’s a lot less fun getting out of a trade. People just don’t like thinking about it.
Penn: What which are more important to master: entries or exits?
Dr. Elder: Exits, I think exits are so much more important. Beginners pay a lot of attention on entrance but how you exit is really what determines the trade. You know almost every trade is profitable at some point. There are very few trades that just go bad from the get go. Even the trades where people lose money have been profitable at some point. How come you didn’t recognize it? How come you didn’t grab this profit? Entrances are relatively easy. Exits are what separate experts from amateurs.
Penn: Would you say that the problems that people have with selling are stage one types of problems; technical, they’re not using the right tools? I know that you mentioned like moving averages and envelopes. Or do you think the problems are psychological?
Dr. Elder: More psychological, I think. More psychological. Selling is not a pleasant thing. Every trade is a hope and selling, I think, is losing that hope.
Penn: Is that the case even selling in a profitable situation?
Dr. Elder: Yeah. Of course. A profitable situation can become more profitable.
Penn: Ah, I see. So is it that people are thinking of more money that they could have made in their mind than the money that’s there to be made right now.
Dr. Elder: Greed and fear. Greed for more profits and fear of more losses. Nothing new under the sun.
Penn: I want to turn to the topic of short selling also in the book. Short selling is something that a lot of people, a lot of retail traders have been encouraged to stay away from. Do you think that selling short is inherently any more dangerous than buying stocks, the currency fairs for example?
Dr. Elder: No. Last time I checked stocks went in both directions. They went down as well as they went up. .
There are a couple of things to keep in mind. One is that stocks go down twice as fast as they rise, by and large. So you have to be much faster on your toes in terms of entrances and exits. When you sell short you have less time to think.
And of course some beginners say, “Oh but if you sell short, your exposed on limited gain and they allow for unlimited loss. To that I say, simply, don’t be a fool. If you’re going to sell short a stock at $100 then you watch it go to a $1000, you deserve every thing that you get. So when you get a fair trade you have to have an entry, a profit value and a stop and if you don’t have them, you get what you deserve.
Penn: In this book you talked more about some of your own trading than you might have in past books.
Dr. Elder: Yes. Actually the book has several case histories where I show a trade that I did and I say, “Well here’s what the market looked like when I began to approach it and here is what my entry looked like and here is what my exit looked like and here’s what it looked like two months later.” Which shows I entered at a good time or a bad time. Yes sort of running case histories.
Penn: You have helped popularize a number of technical indicators, like the MACD histogram, which is a favorite of mine. You’ve also created indicators like the Force Index. In this book, “Sell and Sell Short” you talk a lot about using envelopes for price targets, rather. What sort of tools, in terms of exiting trades, are you finding to be some of the most helpful ones?
Dr. Elder: You know, I have something I call Five Bullets to a Clip. A trader is allowed five indicators max. I mean we’re looking at five pieces of data, open, high/low, closed, volume, right? Plus open interest for futures. So using a large number of indicators is counterproductive. Get a small number and use them well.
In this book I show what I use: envelopes, moving averages. I heavily rely on the impulse system which is not really a trading system. I call it a censorship system which tells you you’re not allowed to buy now, you are not allowed to sell short now. It keeps me out of the more dangerous trades. But that’s about it; moving averages, envelopes, histogram, Force Index and, of course, the Impulse system.
Penn: Let’s end with this then. If someone is looking to get started, we’re talking maybe somebody who’s coming on to that stage one that you mentioned previously, what would be your recommendation? What would you say to the person who says, “I’m getting a bit of capital together. I’m very interested but I really don’t know what are the first two or three things I should do?” What would you advise to someone who’s just trying to get going?
Dr. Elder: I am very skeptical about paper trading. When you have a system that you want to test, just open a tiny little account and trade 100 shares at a time. But do it with real money. The only value of paper trading is as a test of discipline, a way of finding out if you have the discipline to follow-through or not.
Also, don’t try to make a lot of money at first because you will only be stressing yourself and losing that money. Trade small size, learn your moves. You can always scale up when you know what you are doing.
Keep good records. Start a diary, start a diary from day one. Keep track of all your trades. My other advice would be start with little money because so many people come into this thing and they are thinking, you know they try to make money out of this thing right away. And I would say to people, “Think of other things you have done, if you’re a dentist, if you’re an engineer, if you’re a teacher, you did not become successful on your first year. Think how long it took to become good. It’s no different with trading. It’s going to take time to become good.
Penn: Thank you very much for your time today, Dr. Elder. After reading so many of your books, it is privilege to speak with you.
Dr. Elder: Thank you.
David Penn is Editor in Chief at TradingMarkets.com.