Learning from Elder's Trading Method's

The first shares I ever bought were in Nortel (NT), the Canadian telecom which filed for bankruptcy protection recently. When I bought the stock, more than six years ago, I didn’t know much about investing or trading stocks. The reason I bought NT was simply because it was cheap in dollar amount. That’s right. How much could I lose with a stock at $0.47 apiece?

Since then, I have bought and sold many stocks. Some I have turned over only after holding them for a few days to make a few quick bucks. Some I have been holding for years and have no plan to sell, such as China Life Insurance (LFC) and Visa (V). For all those trades, I applied little, if any, technical analysis in determining when to buy.

While timing doesn’t really matter too much if I want to hold the stock for years, it has proven deadly for some stocks that I never had any intention to keep. Then again, I never seriously learned anything on technical analysis either, except reading pieces of information here and there. The book, Come Into My Trading Room, A Complete Guide To Trading, by Alexander Elder, is the first book I have read on technical analysis.

Alexander Elder’s book is really eye opening for me and I wish I had read it earlier and not just now. Though I never wanted to be a trader and won’t become one, I do want to improve my trading to make the trades more profitable. Dr. Elder is a very successful trader and his book offers insights from which one can learn a lot.

In the book, the author shares what he calls the three M’s for successful trading: Mind, Method, and Money, which are described in the book as the trading psychology, trading method, and money management. Dr. Elder spends a lot of time discussing technical analysis in the book.

In the trading method part, the author explains in great detail how to read stock charts and how some widely-used technical indicators work. Though there are many tools a trader can use to make trading decisions, Dr. Elder cautions against using too many indicators: If five signals can’t make a trader feel confident about a trade, five more aren’t likely to help. So in the book, the author focuses on five indicators: Moving averages, channels, MACH-Histogram, Force index, and one from several candidates such as Elder-ray and Stochastic, etc. The goal, of course, is to help a trader develop confidence. Among the five indicators, Force Index is actually Dr. Elder’s own secret weapon, which helps identify market’s turning point by putting price change and volume together. (Click to enlarge)

Though the book was published nearly 7 years ago and the author claims that Force index has been adopted in many technical analysis tools, I wasn’t able to find it in a few that I am using. So I have to plot it myself to see how it looks and how to use it. I have written a small MATLAB program to do my own analysis using Force Index (the red line in above plot) and other indicators.

In addition to trading methods, Dr. Elder also spends a good deal of time discussing trading psychology and money management, two essential pieces for successful stock trading beyond trading techniques. One of the methods he suggests every trader utilize is record keeping (writing down the purchase price, printing out the chart, etc). As a trader learns from the stock market, he/she needs to constantly go back to his/her trades to identify errors so they won’t be made again in the future. He also recommends dividing the trading account into several parts such that the whole account won’t get hurt too badly if one part doesn’t do well.

I am still absorbing some concepts from the book and trying out some ideas myself, but so far I think the book is a good read.

Comments

[ACEMAN:]

Y'all get all goose pimples reading about the good Dr. Elder? I think those goos bumps are nothing but a gullible mind seeaching for the Holy Grail of so-called technical analysis: it can't predict the future (nothing can), it can't tell you what to do (you might as well understand you want to truly believe in moms and dads are always right), and price, well is just price on someone's idea of a continuous linear graph. But the world of serious investing is about valuation's of a companies ability to make money and grow and realize that there are times when your company will go up and it will go down and a nice dividend will help brace your anxiety in down times. It's time to grow up and see that the hard part of making money in the markets is to find great companies, not just numbers on a linear line. It's time you got over your fixation of technical analysis: it ain't technical and it ain't analysis. It's whimsy.

Feb 27 03:41 PM

[Prudentbear:]

Completely agree with the first comment above. 'Sun', you need to learn about Business, not graphs and charts. Try beginning with the Intelligent Investor by Ben Graham. If that isn't too difficult, get Securities Analysis, also by Ben Graham. Aceman is right, everything else is just whimsy.

Feb 27 05:00 PM

[John Bonheur:]

Maker, you are really arrogant for telling Sun to learn. Concerning the 2 comments above, I think you haven't understood the idea behind technical analysis. It has nothing to do with astrology. Everybody agrees that price of stocks reflect a consensus of value linked to the trust in dividends/cashflows that the company will generate.
The "business factor" as you mention it is already integrated in the price. But it's not interesting since you will have no more information about the company and economic environment and not able to predict a more confident value as the best business analysts.
What you do when you make technical analysis is just trying to trade in the "good" direction using mass psychology theory. The mass of traders is whether strongly influenced by buyers or sellers depending on the behaviour of each respective group. That's all.

Mar 08 04:30 AM

[Conan the B...:]

Alexander Elder, psychiatrist turned Trader, books translated into 10+ other languages. Makes sense that psychology would be very useful in a dysfunctional economy led by a dysfunctional Government.

Mar 19 09:44 PM

[docneil:]

Elder is a serious technical analyst, straight shooter and entertaining writer. For those of you that think all that matters is the balence sheet, good luck- holders of BSC, MER and many others found out the hard way that the information you needed to know was not available to common investors till it was too late. When the toxic waste in the balence sheet begins to go critical, the earnings announcement may be too late. For technical traders though, the price pattern told you all you needed to know. So go ahead and examine the annual report and read your Graham. Maybe that's all you need if you are a buy and hold type investor and youve got years to wait. Generally however, the market can be 'irrational' for longer than you can remain capitalized. A glance at the charts may invaluble and Elder is the guy to teach you how to do it in a simple but sophisticated manner.

Jul 26 11:08 PM