breakout. “10 minutes is OK, but trade tomorrow!”
I thought about what had happened and realized what my problem was. Iwas like a skier at the top of the hill who had taken a bad spill and was afraidto go down again. Whatever my technique, if I was afraid to go downhill, 1could not be a skier.
Fear of placing an order is the biggest problem that a serious trader can
269268 RISK MANAGEMENT
Keep moving it in the direction of the trade so that no more than 2 percent ofyour growing equity is ever exposed.
More aggressive traders use the 50 percent rule. If you follow it, half thepaper profit is yours and half belongs to the market. You can mark the high-est high reached in a long trade or the lowest low reached in a short trade,and place your stop halfway between that point and your entry point. Forexample, if prices move 10 points in your favor, place a stop to protect 5points of profit.
If in doubt, use the Parabolic system (see Section 44) to help you adjustyour stops. When you are not sure whether to stay in a trade or not, takeprofits and re-evaluate the situation from the sidelines. There is nothingwrong with exiting and re-entering a trade. People think much more clearlywhen they have no money at risk.
After the Trade
A trade does not end when you close out your position. You must analyze itand learn from it. Many traders throw their confirmation slips into a folderand go looking for the next trade. They miss an essential part of growing tobecome a professional trader — review and self-analysis.
Have you identified a good trade? Which indicators were useful andwhich did not work? How good was your entry? Was the initial stop too faror too close? Why and by how much? Did you move your stop to a break-even level too early or too late? Were your protect-profit stops too loose ortoo tight? Did you recognize the signals to exit a trade? What should youhave done differently? What did you feel at the various stages of the trade?This analysis is an antidote against emotional trading.
Ask yourself these and other questions and learn from your experiences.A cool, intelligent analysis does you more good than gloating about profitsor wallowing in regrets.
Start keeping a “before and after” notebook. Whenever you enter a posi-tion, print out the current charts. Paste them on the left page of your note-book and jot down your main reasons for buying or shorting. Write downyour plan for managing the trade.
When you exit, print the charts again and paste them on the right page ofyour notebook. Write down your reasons for exiting and list what you didright or wrong. You will have a pictorial record of your trades and thoughts.This notebook will help you learn from the past and discover blind spots inyyour thinking. Learn from history and profit from your experiences.Afterword
 
One hot summer, in the mountains of northern Italy, I sat down to draft thefirst outline of this book. Two and a half years later, on a frigid January inNew York City, I printed out its last chart. I wrote and rewrote this bookthree times, to make it clearer and to reflect my growing experience.
I have changed as a person, and my methods continue to evolve. If I couldwork on this manuscript for another two and a half years, it would become adifferent book, but it is time to let go.
Pulling the Trigger
Traders sometimes confide in me that they have trouble “pulling the trig-ger” — buying or selling when their methods tell them to go long or short. Ihad this problem once, for a very short time. My friend Lou, to whom thisbook is dedicated, helped me get rid of it.
One Sunday afternoon I mentioned to Lou that I saw several attractivetrades but doubted I’d take any of them the following week because I hadrecently gotten beat up in the markets. Lou, who is usually cool and mild-mannered, suddenly began yelling. “I want you to trade at the opening onMonday!” I did not feel like trading —1 was afraid of losing. “I don’t give ashit whether you win or lose — trade tomorrow at the open!” I seldom trade atthe open, but I could trade 10 minutes later, looking for an opening rangebreakout. “10 minutes is OK, but trade tomorrow!”
I thought about what had happened and realized what my problem was. Iwas like a skier at the top of the hill who had taken a bad spill and was afraidto go down again. Whatever my technique, if I was afraid to go downhill, Icould not be a skier.
Fear of placing an order is the biggest problem that a serious trader can
269270 AFTERWORD
have. There is no way to handle this problem with ease and comfort. It has tobe handled hard, by a sheer effort of will, which is why Lou yelled at me—as a friend. ‘
You need to design a system or borrow one from this book and adapt it toyour needs. Skiers do a little practice on a bunny slope, and you can paper-trade. Design a sensible money management plan, using the 2 percent rule.Limit your monthly losses to the maximum of 6 percent or 8 percent of yourrisk capital. At this point you are like a skier, ready at the top of the hill.Push off when your system flags you to go! Push off now!
If you do not go downhill when the flag comes down, you might as wellsell your skis and take up golf or raise goldfish. In other words, forget abouttrading.
Now you have a system, you’ve learned money management rules, youknow the psychological rules for cutting losses. Now you must trade. Canyou? Traders try to weasel out of making this decision. They papertrade foryears, buy automatic trading systems, and so on. Several traders have evenasked me to hypnotize them. These games must end. It is time to make aneffort of will!
Consider this book my friendly yell at you.
The Endless Trail
Markets change, new opportunities emerge, and old ones melt away. Goodtraders are successful but humble people — they always learn. Being a traderis a lifelong challenge.
I hope this book helps you to grow as a trader. If you have read this far,you must be serious about your work. Take this book for what it is—adescription of what’s on one trader’s mind and how he goes about solvingproblems that all of us face. Take the ideas that appeal to you, and shapethem to fit your style.
If you believe that being a trader is worth the effort—as I decided yearsago—my best wishes to you. I continue to learn, and like any trader, Ireserve the right to be smarter tomorrow than I am today.Acknowledgments
ee
After finishing a project of several years, I owe a sweet debt of gratitude tohundreds of persons — teachers, friends, and clients. If you do not see yourname here, please forgive me, and I’ll thank you in person the next time wemeet.
Thanks, first of all, to all the clients of Financial Trading Seminars, Inc.Often a phone would ring and a trader would ask for “Dr. Elder’s book.” Thebook was not written yet, not advertised anywhere —but clients expected abook from me. That was terrific encouragement.
Writing a book was a hard job, but it helped me organize my thoughts andbecome a better trader. Two friends provided a soft push at the birth of thisproject. First, Tim Slater invited me to seminars in Asia, and then MartinPring introduced me to people at WEFA, which led to a conference in Italy.Walking with Tim through Snake Alley to a smoky restaurant in Taipei and,a few months later, sitting in a cafe in Milan with Martin, I felt friendly butunmistakable pressure to organize my thoughts and start writing.
The blank screen of a word processor seemed huge and forbidding. To getthe job rolling, I offered a number of seminars and taped some of them.Those transcripts helped me flesh out the ideas for this book. Thanks to allthe analysts and traders in New York and Toronto, London and Singaporewho came to my seminars, listened, and asked hundreds of questions. Somewere experts whose comments forced me to stretch my mind farther than Iexpected; others were beginners whose questions served as a reminder tokeep my feet on the ground. I hope you are all making money trading.
Three persons, a colleague and two patients, have opened my mind to theidea of 12 Steps —a major factor in my improvement as a trader. Thank you,Dagmar O'Connor, Jim S., and Kathy H. (Kathy died last year, after a longbattle with cancer, and visiting her for months in a hospice reinforced mybelief that there are values more important than money.) Thanks to the pro-272 ACKNOWLEDGMENTS
fessional traders who came to consult with me as a psychiatrist and entrustedme with their confidence. You reinforced my conviction that if you get yourhead in order, money tends to flow in.
Great thanks to everybody who works for my company, Financial TradingSeminars, Inc. It is a unique group of people — intelligent, dynamic, and funto be with. Each has been selected from dozens if not hundreds of appli-cants — you are the best. Thanks especially to our managers — Carol KeeganKayne and Inga Boguslavsky. Carol helped me edit every chapter. We hadmany passionate arguments about the language, most of which Carol won,and if you have any complaints about the clarity of this book, I’ll give youher number.
Once the manuscript was ready, I divided it into a dozen sections andmailed each to a top expert in the field. These busy and successful peoplefound time to review several chapters each and suggested many improve-ments. In addition to the friends already mentioned, they included GeraldAppel, Stephen Briese, Ralph Cato, Mark Douglas, John Ehlers, PerryKaufman, Tony Plummer, Fred Schutzman, Bo Thunman, Ralph Vince, andDavid Weis. Thank you for being so generous with your time and advice. Ifthe market is a minus-sum game, then having friends like you is an espe-cially big plus!
Thanks to the analysts who wrote before me. It was often hard to find whowas first—there is a thicket of conflicting claims in our field. As HenryKissinger once said, “Academic fights are so bitter because the stakes are sosmall.” Most charts in this book were drawn using CompuTrac software onan IBM-compatible and imported into PageMaker® for the Macintosh.Thanks to Norbert Rudek for helping to set up the system and for unstintingphone support. Thanks to the editors at Barron’s, Futures, Technical Analysisof Stocks and Commodities, Futures and Options World, and other maga-zines for encouraging me to write articles and book and software reviews — itwas a good training for the book.
Many thanks to Stephen Reibel, M.D., a fellow psychiatrist and a formerboss at St. Luke’s—Roosevelt Hospital Center for covering my practice. I cango and teach all over the world knowing that my patients in New York are ingood hands.
Lou Taylor, to whom this book is dedicated, has offered a treasury ofsuperb ideas. I wish he would write a book. His wise advice made a hugedifference at several important turning points. My family, especially Miriam,Nicole, and Danny, provided cheerful support and a happy diversion frombusiness.ACKNOWLEDGMENTS 273
Finally, I want to thank my friend from way back when, NicolaiGorbunoff. A scientist, he was destroyed by the Soviet system when I wasbut a teenager. In the closed, Communist party—dominated world that welived in, he planted a simple but revolutionary idea in my mind: that the onlystandard for research and work was the “world class.” You had to strive to beamong the best in the world, or else it did not pay to try. Thank you Nicolai,and thank you, all my friends.
New York Dr. Alexander ElderNovember 1992Sources
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 Index
 
Accumulation/Distribution, 175-178crowd behavior, 176how to construct, 175-176trading rules, 176-177Volume Accumulator, 177-178Advance/Decline line, 206-207. Seealso Stock market indicators.Alcoholics Anonymous (AA) and trad-ing, 29-33, 39-40. See alsoPsychology of trading.denial, 30-31rock bottom, 31, 34-35Losers Anonymous, 37-38recovery, 29, 31, 34, 36-38the first step, 31-32, 35-3712 steps, 29-32, 42, 271
Breakouts, 79-80, 105, 107-112, 170,250, 265false, 76, 79-80, 107, 250pullbacks, 84-85, 91-93, 103, 108,111, 113
Channels, 93-94, 247-253Bollinger bands, 248, 251-253how to construct, 251-252trading rules, 253channel trading systems, 250-252.See also Trading systems.
Commodity Channel Index, 253four types of channels, 247-248moving average channels, 248-251how to construct, 248-249mass psychology, 249-250trading rules, 250-251parallel to trendlines, 93-94Chaos and noise, 47, 74, 124, 157, 188,203Charts, 69-74, 115-116. See alsoPrices.bar, 69intraday, 70, 135, 206, 248. Seealso Day-trading.meaning, 70-73tails, 88-89weekly, 70, 80, 90, 104, 109, 112,133, 135, 152, 156, 160, 225,237-239, 248, 249candlestick, 73, 178chart patterns, 46, 61, 65, 70, 91, 99,101-114, 166, 185. See alsoHead and shoulders; Rectangles;Support and resistance; Trendsand trading ranges; Triangles.congestion areas, 75-76, 88-89, 93,107, 109-110continuation and reversal, 101-102,107-108, 110-113, 208, 244
279280
crowd psychology, 76-77, 82,91-92, 95-96, 98-99extreme points, 75, 88-89, 93.See also Charts, bar, tails.tops and bottoms, 70, 202, 210double tops and bottoms, 113-114hand-drawn vs. computerized,115-116, 118Market Profile, 22, 73-74point-and-figure, 69Commitment indicators, 215-219. Seealso Indicators, psychological.Commitments of Traders index, 217insider trading, legal, 217-218odd-lot activity, 218-219. See alsoStock Market indicators.stock exchange members, 218. Seealso Stock Market indicators.Computers, 9, 15, 69, 116-119data, 116-119hardware, 116-118quote machine, 43, 46, 48, 52, 87,201software, 34, 53-54, 116-118, 251black boxes, 117-118gray boxes, 118, 124, 188MESA, 117, 124, 188-189toolboxes, 54, 117CompuTrac, 117, 183, 272three steps to computerized analysis,116fact sheet offer, 117Consensus indicators, 209-215. Seealso Indicators, psychological.bullish consensus, 210-214how it works, 211-212Contrary Opinion theory, 209-210advisory opinion, 210-213financial advertisers, 214-215media headlines, 213-214Cycles, 18-19, 41, 82, 124, 130, 151,187-189. See also Time.Fourier analysis, 188
INDEX
Maximum Entropy Spectral Analysis(MESA), 117, 124, 188-189
Day-trading, 12, 101, 119, 135, 193,237. See also Charts, intraday.
vs. position trading, 119, 243
The Directional system, 83, 135-141,
237. See also Indicators, trend-following.
crowd behavior, 139
how to construct, 135-139
trading rules, 139-141
identifying “baby bulls,” 140-141
Edwards, R. D., and J. Magee, 70, 79Elder-ray, 112, 220-227, 239-240,265. See also Indicators, oscil-lators.how to construct, 220-222Bull Power and Bear Power,221-227trading psychology, 222-224trading rules, 224-227Elliott Wave theory, 18-21, 70, 265Elliott, R. N., 20, 23, 70, 265
Financial Trading Seminars, Inc., 4,44-45, 116, 271-272fact sheet offer, 117Force Index, 100, 227-234, 239-240.See also Indicators, oscillators.how to construct, 227-229trading psychology, 229trading rulesintermediate-term, 232-234short-term, 229-232, 239-240Freud, Sigmund, 24, 57, 62, 187
Gann, W. D., 23, 70interview with son, 23Gaps, 95-101causes, 95-97valid and phony gaps, 96-97trading rules, 99-100INDEX
types of gapsbreakaway, 96-99, 100common, 96-100continuation, 96-97, 99-100ex-dividend, 98exhaustion, 96-97, 99-100island reversal, 100opening, 101
Government and trading. See alsoInside information.
Commodity Futures TradingCommission (CFTC ), 215-217
position limits, 52, 215-216
reporting levels, 215-216
Securities and Exchange Commission(SEC), 50, 215, 217
Granville, Joseph, 20-21, 172. See alsoOn-Balance Volume.
Gurus, 17-23, 34, 43, 58, 63. See alsoElliott, Gann, Granville; Tradingindustry, advisors.
dead gurus, 22-23magic method gurus, 21-22market cycle gurus, 18-21, 63
Head and shoulders, 102-105, 166. Seealso Chart patterns.inverse head and shoulders, 105-107trading rules, 104-105Herrick Payoff Index, 183-187crowd psychology, 184~185how to construct, 183-184trading rules, 184-187chart patterns, 185-186divergences, 185-186
The Hound of the Baskervilles signal,104-105, 177Indicators, 65, 114-166, 264-265. Seealso Overbought and oversold.and chart patterns, 80, 83, 95, 101,104choosing the length, 123-125, 152
281
the 5 percent mule, 164, 248tule of thumb, 124-125, 152crowd psychology, 122, 128-129,131-132, 139, 146, 150,152-153, 158, 164, 169-171,173, 176, 179-181, 184-185,195-197, 203-205, 211,222-224, 229, 245, 249-250developing your own, 117. See alsoElder-ray, Force Index.divergences, 63, 64, 80, 92-93, 114,133-135, 148-150, 153-155,158-160, 173-174, 176-177,185-186, 191, 196-199, 204,2