Dr. Alexander Elder is a highly reputed guru in trading business. I attended his 3 days Pacific Traders' Camp 2012 organized on 19^th – 26^th May at Macau. Here are the main highlights of this Trader's Camp:

Why do people lose money in trading?

Dr. Elder explained that people don't trade to make money and emerge as a better trader. On the other hand, most of the traders engage in trading activities to get some respite from their boring lifestyle. So, these intellectuals consider trading as sophisticated gambling with losses as part of the game. They hardly bother about losing money because they trade for fun and enjoyment, relegating the objective of making money to secondary positions. However, when you are serious about trading, making money and emerging as an experienced trader should always be the prime objective.

Do not count money

As long as you are successful in achieving your objective of making money, there is no need to whittle down your focus by considering the fine details of profit and loss statements. He cited the example of a medical practitioner who keeps track about the status of his business by roughly estimating the number of visiting patients rather than exactly calculating the amount of monthly, weekly or daily profits. So, never lose your focus from the trading quality.

Elephant vs Rabbit hunting

Highlighting the importance of making smaller profits with relatively shorter openings, Dr Elder claimed that he preferred to be a cleaver rabbit hunter than the arrogant elephant hunters who keep their positions open for longer duration to catch big trends. Dr Elder clarified that he was not pointing the deference to emphasize the superiority of one strategy over the other. The effectiveness of these two methods depends on your personal capacity and comfort in executing them. While he felt satisfied with rabbits, you can go for bigger elephants if your resources allow you to do that.

Technical Analysis

Trading revolves around the following four styles: Insider trading; Technical analysis; Fundamental analysis and gut feelings. Dr Elder revealed that he relied on Technical Analysis. Fundamental analysis is more suitable for making profits over a long term. For example, a country's economy may be very vibrant, but its currency prices may still fluctuate on a day to day basis. Despite being comprehensive in nature, fundamental analysis doesn't reveal the optimistic or pessimistic swing of the market. On the other hand, TA can help you in identifying the trend with the similar psychological mindset of investors. Dr Elder described price as the momentary consensus of value among the participating investors. The Moving Averages provide a composite snapshot of prevailing market. In fact, the slope of Moving Average, the distance of price from Moving Average and the deviation between two Moving Averages can sever as very important indicators of market trends.

Price fluctuates above and below value

Quoting the research work of Benoit Mandelbrot on cotton prices, Dr. Elder claimed that it had been proven that prices fluctuate above and below value. He defied value as the gap between the two moving averages. The price moves within the band defined by the moving averages. We may predict almost 95 percent price movements by simply adding a moving average envelope or band, and can easily find out the manic or panic points in the market. Obviously, the success mantra lies in selling at the top level of this Moving Average band (manic point) and buying at the lowest level of Moving Average band (panic point). The value or gap between the two Moving Averages should define your profits.

Strategic and Tactical decision-making process

Make sure to evaluate your strategic decisions by considering a bigger time-frame before taking tactical decisions on a smaller time frame. For example, if you are planning to use a daily chart, consider the weekly chart to evaluate your strategy of keeping your position open. If the weekly charts suggest you to keep your positions open, you may consider daily charts for benefiting from daily fluctuations.

5 Favorite Tools

Dr. Elder described open price, high price, low price, close price and volume as the five important data variables for analyzing the market. If you can understand what these variables indicate, you don't have to overload your fragile mind with too many indicators and fundamentals.

• 13 days & 26 days EMA
• Envelope
• Force Index
• MACD Histogram
• MACD-lines

These five important tools of trading that he described in his book entitled Come Into My Trading Room.

The most important method is Divergence system (Buy new lows and sell new highs)

Dr Elder revealed that the signals of divergence trades have always helped him to earn a good profit. He explained this strategy in his books 'Come Into My Trading Room' and 'Trading for a Living.' The following example will demonstrate how you can buy at new lows and sell at new highs to gain maximum profit:

The market fluctuations can be described by bulls or bears that define opposite trends. When the market is bullish, the bears are weaker and vice versa. The best approach is to identify the strongest one and go with it. MACD histogram shows a bullish divergence because of being shorter. Obviously, the bears are getting weaker, and you should go for bullish trends. The same formula works for bearish divergence.

Learn to survive first

However, before you can expect good returns from your trading activity, you have to learn the basics for surviving in the fragile market, particularly if you are a novice trader. A single disastrous loss or several small losses over a period of time are the two main causes of high mortality in trading business.

Dr Elder suggested two money management rules for keeping away from troubles. As the first rule, he suggested to keep the risk on a single trade to less than two percent of your capital while the second rule requires you to keep the risk of your entire position to less than six percent of your capital. Obviously, with two percent risk per trade, you can engage in only three trades.

Keep a journal

It may sound repeatedly told impractical suggestion, but Dr Elder reiterated that a trading journal is very important for novice traders, who want to improve their trading skills. The traders should evaluate their trades by considering the following formulas:

• Buy Grade: (high - buy point) / (high - low) [A score of 50 percent or higher should be considered as a good buy]
• Sell Grade: (sell - low) / (high - low)
• Trade Grade: Depending on the moving envelope range
  • A = More than 30 percent
  • B = 20 - 30 Percent
  • C = 10 - 20 percent

I learned a lot from Dr Elder and hope you will also find his work interesting.

2012 Pacific Traders’ Camp Photos

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