by Xavier Lim, 13/01/12
In this volatile market, Dr Alexander Elder is one of the world’s most talked-about professional traders. His contribution to the trading community through his best-selling books and classes has helped many people to become successful traders.
He is the author of ‘Come into My Trading Room’, Barron's 2002 Book of the Year, and ‘Trading for a Living’, which is considered as modern classic among traders. He is also the originator of Traders' Camps - week-long classes for traders, as well as the Spike group for traders.
The year 2011 was difficult and complex for global economies and many economists are expecting that the year 2012 will be no different. What does Dr. Elder see ahead, and what advice does he have for traders?
Dr. Elder shared his views with Shares Investment (Singapore) in an exclusive interview. We discussed his views on the current stock market situation as well as his thoughts on trading and how traders can improve themselves. His comments follow:
Shares Investment: Do you think the volatility witnessed in 2011 is an "unfinished business" that will continue affecting the markets in 2012?
Dr. Elder: Investors and traders must understand that all markets are cyclical, it can peak as well as slide to the bottom and rise to the peak again. When one cycle is finished, the next begins.
Based on my studies, we are in the bull market since March 2009. However, stock markets experienced a correction last year in May, and I foresee that this correction, which has been going on for 7 months, is ending.
Investors and traders must be aware that volatility is also cyclical. During a bull market correction, stock market can be very volatile, but when the correction ends, volatility will decrease.
SI: In your book, "The New Sell & Sell Short", you have included an intensive study guide with over 100 questions and answers. Can you tell us how it can benefit readers in their trade?
Dr. Elder: Normally when you read a book, you don't absorb everything unless you practise what you have learned. For example, a student will not be able to score high points in his exams if he did not attempt to do past years’ questions. By simply listening to what the teacher teaches will not prepare him well for his exams.
Similarly, in trading, the best form of study is to solve tactical problems from real market situations, essentially placing you into a professional trader’s mind and trying to figure out the stock market’s next move. These 100 over exercises will prompt readers to think on their own to determine what type of trading plans they should adopt - when to take profits and set stops at what price?
SI: Since selling short carries a certain amount of risks, what advice would you give to someone who is new to short selling?
Dr. Elder: I must emphasize that short selling is not a strategy for beginners and inexperienced traders, only traders who know what they are doing should attempt this. Theoretically, you can lose more than when you just buy a stock.
I would advise those experienced traders who want to learn short selling to start off with small positions. When traders take on a larger position beyond their comfort zone, they may succumb to emotional stresses and end up making irrational decisions. It is important to trade high liquidity stocks so as to allow yourself to get in and out easily, to enter and exit a stock at a good price.
SI: Do you screen all your stocks using the Triple Screen System or do you add certain variables to it, depending on the industry the stock is in?
Dr. Elder: I use the Triple Screen System to screen all stocks and any stock indexes. I will only improvise and fine-tune the system from time to time to suit current market changes. The Triple Screen System begins by using a longer-term trend following technique and a shorter-term overbought/oversold indicator to time the trades.
However, most traders only pay attention to the daily charts, but if you begin by analyzing the weekly chart first your perspective will be much broader. By analyzing the long-term chart first allows you to take up your strategic positioning.
Next, take up your tactical positioning by using a daily chart to find buy or sell setups in confirmation with the daily and weekly chart readings. When the weekly chart shows an uptrend, any declines on the daily charts will be your buying opportunities.
SI: What do you think are the common pitfalls that most traders experience in their journey? What advice do you have for those who want to trade for a living?
Dr Elder: Traders go through different stages as they work through their trading journey. Some improve themselves and move on to a higher stage, and others don’t. I would say that a trader should have his foundations right from the start. Many are too eager to get to the finish line and forget to have a good start.
At the early stage, beginners have no knowledge in trading and don’t understand that stock market is complex. They have to acquire this knowledge by reading books and attending courses. Once they have learned this knowledge, they will begin to realize that even with all of the trading methods they have acquired, sometimes they win, sometimes they lose.
Beginners who went through stage one will become much more aware of the importance of psychology. This is where they start planning their trades and stick to the plan. This is stage two.
I urge traders to have two goals in mind for every trade - first is to make money but not every trade will be successful. Second, he needs to learn from his experience.
I notice that many traders simply search for another opportunity to trade after they have made a loss due to wrong move. This is wrong! You can never be a better trader by not learning from your mistakes.
I advise traders to keep track of all their trades. Keep a diary and record every single trade. Write down your plans for each trade, this will make you slow down, preventing you from acting impulsively and trading in an impulsive manner. Keeping a diary helps a trader to understand his mistakes and correct them. This will make you to be a better trader!
Before you think of trading for a living, start with little money; trade small size, learn your moves. Don't try to make a lot of money at first because you will only be stressing yourself and losing that money. Remember, it's going to take time to become professional trader.
SI: One last question before we conclude this interview, if everything held constant, other than the eurozone crisis continuity, do you think it's possible to see at least some kind of rebound in the first half of 2012?
Dr Elder: Yes, we are in the bull market since March 2009. A cyclical bull market normally lasts an average of four to five years and then we get a bear market. I believe that we are in the middle of a cyclical bull market, which should move up higher this year.
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