The world-renowned trader, author and educator speaks to YTE’s Ben Power about living the trading dream.

Dr Alexander Elder, a trader, coach and author, began his first book with these memorable words about trading: “You can be free. You can live and work anywhere in the world, be independent from routine and not answer to anybody.” Dr Elder knows the value of freedom. Born in Leningrad in the Soviet Union while Stalin was in power, he found freedom by jumping ship in Africa and gaining political asylum in the United States.

He worked as a psychiatrist in New York and taught at Columbia University, but developed a passion for trading. Dr Elder’s trading camps – often hosted in exotic locations around the world – have become legendary. They combine his loves of trading, teaching and travel.

Dr Elder is the author of a number of highly influential trading books. They include the classics ‘Trading for a Living’ and ‘Come Into My Trading Room’, which outlined his trading methods. He has become a wellknown advocate of record keeping as a key to trader development and believes trading has three key areas: Mind (psychology), Method (a trading edge) and Money (risk or money management).

How did you get into trading?

I wanted to make money without working! Then I learned that trading is the hardest way to make an easy dollar. I got into it out of curiosity and I was hooked from the get go. At the beginning I didn’t know what I was doing; it was not trading, it was gambling. After banging my head against the wall I woke up and realised it was a serious business. I ended up not just learning but teaching people as well.

Can you tell us a bit about your personal trading methods?

My trading method is in the book ‘Come Into My Trading Room’. Obviously I continue to refine it, making little changes and adjustments all the time. It’s important to break trading down into strategy and tactics. I always begin by looking at the big picture. It’s important to look at the long-term charts, the weekly charts, over the past couple of years. I find out which markets I’m bullish on and which ones I’m bearish on. I determine my strategy on the long-term charts. I then drop down to daily charts for tactics. I want to find the points to buy or to go short. I focus pretty much on the American stock market. I should probably trade futures again; I drifted out of that. But it’s mainly the US stock market. Occasionally I’ll do a future.

You’ve developed a number of indicators – including the Elder Ray and Force Index. The efficient-market hypothesis says to beat the market you need to know something no one else knows. Has popularising and teaching your methods blunted their effectiveness?

The efficient market theory is a deep and profound truth; it’s also the biggest piece of garbage floating around the market. Most of the time markets are efficient. But when the crowd panics there’s nothing efficient about it. When emotions get involved people don’t make rational decisions. The premise of the theory is that people make rational decisions.

The goal of the successful trader is to recognise times when the markets are rational and when they’re irrational. If they’re rational, there’s no edge. When the markets become irrational, that’s when the cool, calm, collected person can make money.

Are you developing any new indicators?

I have not come up with any new indicators in several years. ‘Come Into My Trading Room’, my absolutely most important book, has all my indicators. But my level of experience is higher, I’ve learned more, I remember more. Little patterns and little zig zags, they speak to me much more clearly now.

Do you take into account what the broader market is doing?

Somebody did a study where they found that in relation to what a stock does, 50 per cent is affected by the broad market, 30 per cent by the industry group and 20 per cent is the stock itself. Obviously you have to study the broad market. I run my portfolio as a hedge fund. I always have long positions and always have short positions. But I’m always backing my sense of where the market is by being more heavily short or more heavily long.

How long do you hold trades?

By and large not very long – a few days to a few weeks. As the bull market was going on in 2006 and 2007 I taught myself to hold positions for the long run. I haven’t done very well with that. I’m still under water with those. But maybe now it’s time to start using that skill again.

Do you have an example of a winning trade?

I taught a class on a weekend in which someone brought up GM (General Motors). We analysed it, and I pointed out that my Impulse System would permit buying if and
when this stock rose to $1.41. I took my own advice for a trade that lasted two days.

Do you have an example of a successful short?

I sold short ORLY (O’Reilly Automotive) after seeing a false upside breakout, accompanied by a bearish MACD divergence. I covered when the stock declined below its moving average.

Your book, ‘Entries & Exits’, profiled a number of traders. Having coached many, what are the characteristics that define successful private traders?

Successful traders tend to have their lives pretty well balanced. They also keep excellent records. The best example: the first chapter in the book was about a trader in California. I happened to be in California and called her up and scheduled an interview. I stopped by her house, interviewed her and had dinner. I went back to my hotel and eventually home. I put the project aside for six months and, after I did several more interviews, realised her interview was not as complete as the others. I was going back to California and called her up. I went to her house and explained to her. She said, ”Remind me what was the date.” She checked her diary and then went to the filing cabinet and pulled out two trades we had discussed. We finished the conversation as if it had begun yesterday.

Successful traders also tend to be eccentric; they’re not nine-to-five corporate-organisation types. Markets are set up for the majority to lose money. The smart minority wins. If you’re going to be a successful trader, you have to operate differently from most people. It’s a lonely position to be bearish when other people are bullish and bullish when other people are bearish. You have to be an outsider.

One of the things you recommend for new traders – which is at odds with your friend, author and trader Colin Nicholson – is to start with swing trading. Can you explain why?

Generally I find that a good market to be in is a swing market. With day trading you’re completely at the edge in front of the screen minute by minute. Swing trading is a comfortable spot. That’s not to say it’s for everybody. The way you trade is an expression of your temperament, just like the way you drive. The way you trade reflects your personality. Swing trading is good for me, for somebody else maybe it’s good, maybe not.

Colin is a very smart and knowledgeable guy. He publishes his market record, which shows he is for real. We have been friends for a long time. But we are very different people. We have very different temperaments. We married different women. It’s different strokes for different folks. Colin is Colin and Alex is Alex.

One thing you’ve hammered into traders is that record keeping is a major key to success. How do you keep your own records?

I used to keep a journal by printing and pasting charts, but now I use an electronic journal, a program called AK47 – there is a video about it at www.elder.com. In addition, your readers may write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it for a free record-keeping spreadsheet and instructions.

Do you think psychological issues for traders are overstated? Is a lack of a profitable edge a bigger problem?

I think you have to have both. You have to have the right psychological set-up and you have to have a technical trading edge. To me, asking whether psychology or an edge is more important is almost like asking is the left leg or is the right leg more important.

What are some common psychological errors traders make?

It depends on what stage the person is at. For beginners, a typical mistake is to think that if only they can find the proper length of moving average, the money is just going to start pouring out of the market. Their error is a naïve belief in the magic of a simple technical method. After traders progress from Method (learning technical analysis, for example), then the Mind, they focus on Money – i.e. risk management.

Are there any guidelines as to how much a trader should risk on each trade and across their whole portfolio?

I advocate the two per cent and six per cent rules. Limit the loss on any one trade to two per cent of your trading equity. If the value of your account falls six per cent in a month, stop trading for the rest of the month. I think these are the absolute extreme numbers for anybody. As people get better they tend to tighten those rules. If you’re trading $1 million, two per cent is $20,000 – do you really want to risk it in one day? Probably not.

I occasionally have people come to me and say: "If I’m really bullish about a stock can I risk more than two per cent?” That’s the equivalent of saying: "I really like this bungee jump so much, can I have a longer rope?” There are other things. Every trade deserves to have three numbers: the entry, profit target and stop. Know where you’re going to enter; have an idea where you’re going to put the profit-taking order; and where you’ll put a stop. The profit target has to be a least double the risk, preferably three times.

Your first book was ‘Trading for a Living’ which is the dream of many traders. But is it realistic?

All I can say is that when I run my traders’ camps, there’s a hidden fee: for every $100,000 they make, they have to buy me a beer. And let me tell you I get a fairly steady supply of beer out of this proposition. It works for people; it doesn’t work for everybody – the world is full of diet books, and the world is also full of obese people. Many traders start by dreaming of quick riches from trading, which many find out is extremely difficult to achieve.

But what kind of returns should traders be shooting for?

It’s outlined in ‘Come Into My Trading Room’. A beginner should aim to cover trading expenses and generate annual returns one and a half times the current rate on T-bills. The serious amateur should shoot for a 20 per cent annual return on equity. The expert is doing very well staying north of 20 per cent a year, perhaps with steadier returns.

Are there any traders you particularly admire?

I admire many of my students. Lots of people who study with me start in a modest way, but will become more skilled and eventually trade for a living. They tell me they’re grateful to me. I say, "We sat in a class with 20 to 80 people; you are the ones who are successful.” They try to give credit to me. Obviously it takes two to tango.

Finally, what is one thing that all traders can do now to improve their trading?

Good record keeping. It’s a boring thing, keeping records. I hate keeping records myself, but I do it. Without that nothing works.

This article was originally published in the Sep/Oct 2009 issue of YourTradingEdge magazine. All rights reserved. © Copyright 2011, Your Media Edge Pty Ltd.

If you would like to subscribe to YourTradingEdge magazine click here, or to purchase this issue as a single back issue, click here.