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Interview with Dr. Alexander Elder: "I want to be a psychiatrist in the market"

29 November 2011, 18:37
MetaQuotes Software Corp.
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Alexander Elder

Dr. Alexander Elder is a professional trader and the author of dozen books. He was born in Leningrad and grew up in Estonia. At the age of 16 he entered the medical school of Tartu University. At 23, while working as a ship's doctor, he jumped a Soviet ship in Africa and received political asylum in the United States. He worked as a psychiatrist in New York City and taught at Columbia University. He was an editor of the book department of The Psychiatric Times.

In 1988 Dr. Elder founded Financial Trading Seminars, Inc., which soon became one of the leading trader training companies. He consults private traders and financial institutions, organizes seminars and conferences for traders. His company produces video tutorials and books on stock trading. Best-selling "Trading for a Living" by Dr. Elder has been translated into 12 languages and has become one of the most popular books in the history of stock exchanges.

Let's start with a traditional question. How did you come into trading?
I came to the United States after jumping a Soviet ship in Africa - it was a pretty notorious case. There I was sheltered by the Tolstoy Foundation established by Tolstoy's youngest daughter. After "six months in the godless Bolsheviks'" prison, she finally left the country, settled in the United States and dedicated her life to helping emigrants.

The Tolstoy Foundation, also called "Tolstoy Farm", is a New York based charitable organization. It housed different people, and I also came there. There I met an American lawyer. We became good friends, although he was a generation older than me. The American took care of me and gave me some good advice. He had a library.

One of the books that I borrowed from my American friend was How to buy stocks by Engel. Engel was a communist, he was kicked out of the Time magazine, and in his spare time he wrote a book about investing in the stock market. The book became a bestseller, and it is still sold. I read it and it captivated me. I realized that I could make money just by thinking. It all seemed very simple. That's how I got interested in trading.

I found a job in the city, earned some money and bought a used BMW bike. But it turned out that keeping a bike in the city is inconvenient and dangerous. So I sold my bike and used the money to buy my first stocks. And then something very dangerous happened, something that I wouldn't wish on anyone - I made money with my very first trade.

Naturally, this gave birth to a delusion that trading is easy - buy, sell, make money. It's very simple. The same thing happened with the second trade. Then I had to spend some trying to get rid of it. It turned out that making money was not easy, but just the opposite. That's how I've come into this business, and I'm still there.

What technical analysis methods did you use then?
I bought my first stocks without any technical analysis. I didn't know about the fundamental analysis and technical analysis. I bought shares of child day care centers, the company's name was KinderCare. They were going to arrange a network of local day care centers of a single format in the US, like McDonald's. At that time all my friends started having kids. We were all about twenty to thirty. All got married and got kids and they all had problems with sending a child to kindergarten, which would let the parents return to work.

I thought the company would have a great future and bought its shares. They cost about $13, and I had money to buy 100 shares. At that time I started to read more serious books. And I discovered technical analysis. Looking at the stocks I said, "It looks like the Head and shoulders". So, I bought based on the fundamental analysis, and sold on the basis of the technical principles. Such was my introduction to the technical analysis.

How long did you hold this trade?
I don't know. A month or so. For the fundamental analysis it is a short period; while for the technical analysis it is long of course. I had no idea that it's necessary to manage not only money, but also time, as well as to control the risks. At that time I knew nothing and was like a blind kitten. So my first poke was successful, after which I got an idea that everything was easy. Then I spent much time trying to lose the habit of using this idea.

Do you trade now?
I trade actively on two markets — on the American stock market, and on the futures market, which is also in the US. Very rarely, maybe once or twice a year, I make transactions with options. I work much with stocks and futures, though I don't trade every day. I see how markets behave - for example, yesterday it was a very eventful trading day. I have no special plans for today.

What have you learned from the markets?
I've learned to live with uncertainty and make decisions in the system of uncertainty. That's the difference between a human being and a computer. If you print some instructions to a computer, and if there is a wrong letter in it, that's all! The computer will halt at that, since everything must be accurate. The computer is much faster than us; it works at a rate that is unreachable for the human brain. Our brains are much slower than the slowest laptop. But a human being can make decisions under conditions of uncertainty. Operate with incomplete information. That's what markets teach us.

All successful traders make decisions without waiting for complete clarity. Because if you are going to wait for the complete clarity, you will have to work with last year's charts. Today's charts move, and these movements are subject to change at any moment. Therefore, the decisions we make are not something of the "exactly up" or "exactly down" kind, but "most likely up" or "most likely down". In these conditions you need to stake your money. It is not easy from the point of view of psychology.

Dr. Alexander Elder:  The market is constantly probing our weaknesses

Is there a difference between stock markets and Forex?
Of course, there are differences. If you compare long-term trends that last for months, those of Forex are expressed much more clearly. Why? Actually, currency markets ultimately depend on the public policy. The way modern nations are organized would not let them quickly change their direction, therefore these trends are more stable. This is the difference between Forex and stock markets.

What criteria do you use when selecting stocks to trade?
First of all, I clearly understand that it is impossible to grasp the immensity. About 10,000 stocks are listed in the US. Naturally, it's impossible to track all or at least most of them. So, at the very beginning you should say to yourself, "I admit my weakness. I know there will be lots of interesting trades made by other people, and I won't even see them." Do not even try to grasp the immensity.

My approach to selecting stocks is the following: I have a small set (about 20 shares) that I watch every week. So I never miss anything in them. I have a pool where I go fishing. This is the first.

Secondly, I have a group of traders at Every week I hold a contest for the best trade. The trade must be opened on Monday or later and be closed on Friday or earlier. Each group member makes a recommendation about a trade for the coming week.

This group includes common and elite members. Totally they are 19, and I carefully watch these trades. Almost every week I find among them a stock that makes me stand still, "Yes, I must have it." These are the two sources.

I repeat my advice for all novice traders: do not try to grasp the immensity!

Do you analyze indexes, screener, etc.?
I don't use automatic screening. It all depends on psychology – it is appropriate for some people and is not for others. For me, obviously, it is not. But I have some indicators that I apply to all charts. Also, I have certain rules. For example, if the pulse system is red (standing to fall), I am not allowed to buy. If the pulse system is green (standing to rise), then I am not allowed to sell short. I take it not as an indication of what to do, but rather as a censor of what I should not do.

With daily charts, I always apply an envelope (AutoEnvelope), which encapsulates about 95% of all prices for the last, say, three months. Buying near the top border of the envelope for me is just as absurd as, for example, whistling in the church. You cannot do that. I never buy near the top border of the envelope, and I never sell short near the bottom border of it.

When the crowd buys at "bulges", it is already too late to buy, they should have done it earlier. It is not a really automatic system, because I still track it, but I have clear rules of what can be done and what I should not do.

What indicators will tell you that it's time to open a position?
To enter a position, I look at the MACD Histogram, especially I like to search for divergence of MACD Histogram and prices. I analyze any share, any security (stocks and futures) in two timeframes – long and short. To enter a position I watch timeframes with 1:5 ratio. For example, a weekly and a daily, or 25-minute and 5-minute. To exit a position I often use envelopes and close a position as soon as the price reaches the envelope bands.

I think financial markets are like manic-depressive patients. Sell when they have mania, and buy when they have depression. The envelope helps me determine where these levels of depression and mania are. There is a joke: "A neurotic is a man who builds castles in the skies, psychotic is the one who lives in them, and a psychiatrist is a person who collects the rent." I want to be a psychiatrist in the market. I want to collect the rent from the madness of the crowd.

Dr. Alexander Elder: I want to collect the rent from the madness of the crowd

What mistakes do traders make? How to avoid them?
The number of mistakes that people can make is unlimited. The market is larger than any of us. The market is stronger, larger and deeper than any of us - than you and me, and any person. The market is constantly probing our weaknesses. Whatever weaknesses a person has, the market will find and beat on them. Fear. Greed. Self-doubt. Arrogance. Whatever the features may be, the market will uncover these features and the trader will lose money.

I can lecture about the discipline, telling people to plan their trades and stick to this plan - but it all works when the markets are closed. When the market is open, they start fussing around the screen – the whole discipline is forgotten. I think the most important factor in the success of a trader is keeping a diary and trading records.

An impulsive person acts impulsively and trades in an impulsive manner. Governed by fear, greed, self-doubt and excessive arrogance, they trade thoughtlessly. When a person begins to write down his plans for each trade, keep a diary for each trade, it makes him slow down, turn around and look at himself. Keeping a diary helps a trader to understand his mistakes and correct them.

I often say, "Show me a trader with good recordings, and I will show you a good trader. Show me a trader without recordings, I will show you an average trader." An average trader is a rather sad picture.

When did you realize that the secret of success is in the diary?
I started to keep a diary in some form almost 20 years ago. But at that time it was not regular. And somewhere about 10 years ago, I realized that it's the center of everything. If you have no diary, you can't enter a trade. For example, it's morning now, and I wouldn't let myself to breakfast until I put my diary in order, and until I add entries about the trades that I had yesterday.

How long does it take to learn to maintain discipline?
Different people need different time. For some people, it is quick and easy - about a year or two. Or some people may need over ten years. It's like saying how much it takes a person to go from home to the city center - people need different time. But on the average, learning trading requires about the same time and costs, as a college education.

People who come to the market all of a sudden and say, "Well, what's it? How to click?... Ok, where is the moving average? Where is an order? Ok, let's start making money." - they simply feed professionals. Professionals depend on the appearance of inexperienced newcomers in the market.

Is there anyone who managed to overcome themselves and succeed among your followers?
Many of them managed to do that. My favorite form of training is the camp of traders. When I hold such camps, I always say on the first day of the camp,
"There is an additional fee that was not mentioned in our camp description."
"What's the additional fee?"
"For every $100,000 that you earn after this camp, I want a bottle of beer from you."

And what amazes me, sometimes people ask:
"How long?"
"For life!"
"Really? For every $100,000?"
"Well, man, you know where to save money. Do it!"

And there are people who give me a bottle of beer from time to time and I drink it with them. It is very pleasing.

Let's get back to the traders camps that you've mentioned. Why do you hold them in tropical countries, far from people's usual activities?
There are several reasons for that. First of all, I love to travel. For me, these camps are the way of life, not just business. Though it used to be different. Now I hold them once or twice a year, and I enjoy them. In addition, it is psychologically impossible to sit in front of the screen every day from morning to night. You need to be in front of the screen and have free time to hang out with other serious traders.

Many traders from the camp become friends, and after that they keep in touch over the years. This is another reason why I try to hold the camps in good places. Finally, prices are much lower outside the US. The money required for arranging a camp in Guatemala, or say, in Bali, would be spent in 4 days in the US. This is better in terms of psychology and money. This keeps the price a little lower for traders and creates a better atmosphere.

This year we had only one camp in the Dominican Republic, in a very nice hotel, which I love. Next year, in January, we will hold a camp in Guatemala, but there are no more vacancies - all are sold out. In May 2012 we will have the Pacific camp; it is usually held every two years.

People come from different countries, but we admit only 25 traders. Moreover, we admit based on applications - you cannot just buy a ticket and come, we admit not any person. There is a certain selection process. People from different countries attend the camp. Bali is very close to Australia, so we expect mainly Australians.

What do you teach there?
Some sense:) What do we teach in the camp? Psychology, technical analysis, development of game systems, risk management.

All this is done in front of a live screen, often with live trades and answering questions. And when there are only 25 people in the camp, and it lasts a week, no question remains unanswered. Psychology, technology, money - all on live examples. A trader for whom the camp is intended is an average trader. We try not to admit newcomers.

Dr. Alexander Elder: Lead, follow or get out of the way

Who is the average trader?
An average trader is a trader that has been in the market for a couple of years, has earned money and has lost money. This trader understands that he needs something more to move to the next step and to become a professional. Our camps are intended for these people.

Professionals also come to perfect their skills. There was a man from Mexico, who was trading futures in one of the major Mexican banks. He is a very powerful trader. He came to perfect his skills. Sometimes beginners come, but we admit them rarely. Usually it is an average trader who wants to move to a higher level.

Do their lives change after the seminars?
It depends. An American proverb says, "You can lead a horse to water, but you cannot make it drink." Some people believe that after they spend some time in the camp, they will become successful traders. Not at all.

They will spend a week in the camp, and they will learn some skills that will help them become successful. Many people become successful. One of my graduates, a farmer from Utah, wrote to me, "Alex, I was a hard working farmer who had to break his back to make $50,000 a year. Now I'm a hard working trader who has to break his back to earn $50,000 a year." It's not about attending and becoming successful. We teach some skills.

Does one need to have special personal characteristics to become a successful trader?
Yes. A person must be disciplined. A person needs a good knowledge of mathematics for fast calculations. It does not require the theory of higher order, but adding, subtracting, dividing, multiplying, finding percentage - you must be able, so to speak, to do all this "on the spot". Discipline, mathematical abilities and absence of any addiction.

I think that people who have problems with alcohol or drugs, do not become successful traders, because they can't hold the stress. When they have stress, they try to escape it shortly, while stress teaches us. There are certain qualities, with which you'd be better keep away from the market.

There are very helpful characteristics: discipline, mathematics. As for professional groups, I'd like to mention accountants and the Marines. Marine officers have a rule "Lead, follow or get out of the way." Those who follow the rules become successful.

What do you think about automated trading?
It's not for everybody. There are people who like to trade using a robot, and there are people who love to play and make decisions while sitting in front of the screen. I belong to the second group, but I have friends who are very seriously engaged in automated trading. The approach to trading, as most of the things in the market, depends on the temperament.

Can the development of automated trading change the market?
No, I don't think so. Markets, by and large, do not change. Markets represent mass psychology, and mass psychology changes very slowly. Maybe it changes from century to century, but it doesn't change from year to year.

What do you think about the MetaTrader 5 platform?
I saw the system this year, when I spoke at a conference in Cyprus. I was assisted by a person who used MetaTrader 5; and he configured it exactly as I wanted. I needed the system to show examples of the use of indicators. I believe that the system is very flexible and powerful.

Dr. Alexander Elder

You've recently released Elder-disk for MetaTrader 5. Tell us about it.
Since yesterday it's been available on our website. We now have a new system - no need to wait for the disk delivery, you can download it and start using it immediately. Of course, we can provide a discount. We will create a coupon with which your readers will receive a discount of 20% (Note: the coupon code is "MQL5" and "MQL4" for Elder-Disk for MetaTrader 4).

What indicators are included in the disk?

  1. MACD Histogram XOver. The pulse system depends on the direction of the moving average and the histogram. When the pulse system is red, buying is prohibited. I'm like a cat near a mouse hole, sit and wait until the color changes from red to blue and I can finally buy. MACD Histogram XOver shows the level at which the histogram will change its direction and the color of the pulse system will change.
  2. Market Thermometer measures by how much the today's price goes beyond the borders of the previous day. Larger values ​​indicate a high temperature of the market, smaller values show that the market temperature is low. The market has a certain periodicity, i.e. cycling between periods of high and low activity. Everyone knows that markets have the "up-down" cycles, even beginners can see is. But the cyclical character of market volatility is a much more delicate matter. This indicator-thermometer verifies this cyclicity, it shows when a cycle becomes very low, i.e. the market is slow-moving and the temperature is low. It's time to catch up or down breakthroughs. The indicator does not predict the trend direction. It only says that it has become too quiet and the silence will be broken soon - so get ready!
  3. SafeZone should be used for calculating levels for placing Stop Loss orders. If you set a Stop Loss too far, your trade has no protection, and if you set it very close, you can catch the market noise. If the average move beyond the previous bar borders is equal, for example, to 5 cents, and the trader places a stop level 3 cents lower than the previous low point, he is just asking for trouble, because he sets a stop level in the area of ​​an absolutely normal volatility. SafeZone shows where the end of the normal noise area is, i.e. it shows the limits within which you shouldn't set a stop level, set it a little further. Naturally, all this is connected with the risk management question. The closer the stop, the larger position we can take. Suppose a trader says, "I will risk $500 in this trade." Let's say he buys shares, and his protective stop is 50 cents far from the entry price - so he can buy 1,000 shares. If he sets a protective stop a dollar far from the price, he can buy only 500 shares. Thus, setting a protective stop is very strongly bound with risk control.
  4. Smoothed ROC is a moving average of Rate of Change, the ratio of the current price to the price, which was a few bars ago. This indicator tracks changes in the moving average, it catches large turns of trends. It's rather an indicator for investments, not trading.
  5. AutoEnvelope. For me it is one of the strongest indicators. It was invented by John Bruns who is, in my opinion, an absolutely brilliant programmer. When people apply an envelope to prices, they set a fixed percent of deviations from the mean, and you have to specify a separate percent for each share. If you look at DowJones, which is now at 11,000, or to a Ford share, which now costs $11, their deviation percentages are very different. The percentage is higher for a cheaper share. John Bruns has programmed this envelope so that the program measures the volatility of the past, say, 100 bars, and builds an envelope on the basis of this volatility. This envelope is perfect for 99% of cases. It's like something mystic for me – you open an indicator and see an absolutely perfect envelope. Always. I use it daily on all charts.
  6. Elder-ray measures the distance between today's highest point above the moving average and today's lowest point below the moving average.
  7. Chandelier. The Chandelier is not mine, it's been developed by my friend Chuсk LeBeau. He says that when you buy a stock, the stop should hang under it, like a chandelier from the ceiling. This indicator measures the distance from the highest point reached during the trend. It allows you to set a stop at a certain distance from the highest point, so the stop then constantly follows the highest point reached in the trend.
  8. Impulse Release shows the state of the market in two timeframes at the same time, for example, in 1-week and 1-day, or half-hour and 5-minute, when both timeframes remove the ban to trade in a certain direction.
  9. MACD Combo shows the combination of the MACD lines and the MACD histogram.

Your books can be ordered right on your website. Is there a possibility to order one with your autograph?
Yes, I gladly autograph my books. There is a special button for ordering an autographed book.

What other books can you recommend to broaden trader's horizons?
You have mentioned my books. In my opinion, the best book on technical analysis is Technical Analysis of the Futures Markets by John J. Murphy, and the best book on psychology is The Disciplined Trader by Mark Douglas. These are two books that I highly recommend. For those interested in fundamental analysis, there is a very good book by Robert G. Hagstrom The Warren Buffet Way.

Thank you for the interview. Good luck.

Translated from Russian by MetaQuotes Software Corp.
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