Former broker David Banister speaks to YTE Magazine about his fascination with Elliott Wave theory.

How and when did you first become interested in the markets?

All the way back to my college days at Skidmore in 1986.  This was when the stock bull market was really ripping higher since Reagan had come into office.  My professor was an Investment Advisor for a local brokerage firm and he peaked my interest.  I’ve been hooked ever since.

How have you been able to educate yourself about the markets?

I studied technical analysis after many years of studying business fundamentals in college and after. I figured out there must be more to figuring out when to buy or sell a stock than just the fundamentals.  I first learned about charting by reading William O’Neil’s books from Investors Business Daily fame, that was a real eye opener.  In the early 2000’s I became a licensed stock broker and developed my own client base over the years.  I studied Elliott Wave Theory from 2001-2003  and once it sunk in I never looked back.

Did you make any mistakes when you first started out?

Everyone makes mistakes not only when they start out but even after many years of experience.  Most of the mistakes center around the inability to control our emotions oscillating between fear and greed. Getting overly exuberant about a stock or a sector is often followed by completely opposite viewpoints down the road. It’s important to stay grounded and objective as possible.

Who have been some of your mentors and role models? What impact have these people made on you personally as well as on your trading style?

William O’Neil early on, and then Robert Prechter and his Elliott Wave group which is where I was exposed to the science.  I think David Bensimon is a genius and Nadeem Walayat is also worth following closely.  My trading style revolves around pattern analysis which in and of itself revolves around human psychology and often taking the opposite tact of the crowd.

Why technical analysis and specifically Elliott Wave theory?

EW Theory is fascinating because there are so many patterns and multiple ways to interpret the exact same patterns.  I try to keep an open mind and think outside the box when I am working on my Elliott Wave opinions, and that often serves me well. Most of the information is often in the charts anyway, so it’s a matter of how the crowd of investors is going to react and then act on the news. News is used to explain what just happened, but most of the time what matters is the psychology of the crowd at the time the news comes out.

Is Elliott Wave theory applicable across all markets and timeframes?

There are no perfect technical analysis methodologies that work at all times.  What I do is mix in some traditional technical analysis, fibonacci relationships, and a few other ingredients to help confirm my interpretations. It works very well I have found for  Gold and the broader market indices like The SP 500 Index and others. It can be boiled down to the one minute charts, hourly, daily, weekly etc.  I tend to work with daily or weekly views for the best results.

Is there any one trade (win or loss) that sticks in your mind that had a profound impact on your development as a trader? What did you learn from this?

I think the key is position sizing being correct going into a trade, and then understanding where you will take your loss assuming you may be wrong. Every trader should go into every trade hoping for the best, but being prepared if things do not develop as planned. There is nothing wrong with taking a loss and moving on to the next trade.  Most investors have problems emotionally with admitting they were wrong, but that is a key component for long term success in the markets as a trader. I also am very aggressive at taking profits and leaving money on the table, anyone who believes they will consistently pick bottoms and tops is fooling themselves.

What markets do you trade and will you continue to trade them in 2012?

I largely focus on the SP 500 index and the Russell 2000 Small Cap index in the US.  I also cover Gold and Silver extensively.

What makes your style/system of trading different from others?

I don’t let headlines sway my opinions, and I am neither a bull nor a bear in between my ears. I try to stay as objective as possible and am ready to shift my opinion if it looks like I may be wrong.  You must be quickly adaptable and not overly biased.  Elliott Wave theory only works if you are open minded to all options, but then take a tact and go with it until you are proven wrong.

What is your number one trading rule?

Always aggressively take profits

Ed Seykota says, “Everybody gets what they want from the markets.” What do you ‘get’ from the markets?

I enjoy trying to figure out the puzzle of the markets and the crowds as they interact together. Every day is a new challenge.

What have you learnt, as a trader, from the volatility of 2011?

You are playing against the machine many times, and the computers are faster than you are and know more information in many cases. The market can quickly shift against your position so again, taking profits quickly is a must and keeping losses small is required.

What does 2012 hold for you?

I suspect 2012 is going to be a rough and negative year for the indices. I plan to do a lot of ETF 3x trading.

David Banister is the Chief Investment Strategist and commentator for ActiveTradingPartners.com. David has written numerous market forecast articles on various sites that have proven to be extremely accurate at major junctures.