Alexander Elder Minds the Markets
By Kristina Zurla Landgraf
Lind-Waldock welcomed renowned author, trader and psychiatrist Dr. Alexander Elder for two thought-provoking webinars on March 29 and April 19, 2005, titled “Mind Over Markets.” Elder shared some insights into how traders can sharpen their mental focus, and how he uses technical analysis to make trading decisions. He also gave his views on trends and trades in several financial and commodity futures markets.
Mental Aspects of Trading
Elder is known for combining what he calls the “Three Ms” of trading: Mind, Method and Money. These are otherwise known as psychology, technical analysis and risk control. Elder said first and foremost, it’s important to feel “at peace” when you trade and not be sweating with every market gyration.
“If you are not peaceful, something is seriously wrong. If you are feeling nervous, reduce your trading size,” he said. Ultimately, you have to trade real money in the markets, so you have to do what feels comfortable. If that means risking less money—that’s what you need to do, he said.
Elder also stressed the importance of taking good notes as you are watching market action and analyzing price charts. You may get a great trading idea when the proper conditions unfold, but when it’s time to make a trade, you don’t want to forget your plan. “When you get a trading idea, mark up your charts. Staple or pin it to the wall. Create reminders what you want to buy or sell when conditions are right,” said Elder.
New traders should also avoid visions of grandeur. Elder said it’s easy to see the potential money that can be made in the markets and think you are going to be a millionaire in no time flat. But the best traders take the time to learn and study the markets, and that doesn’t happen overnight. Elder said new traders should use their first year to educate themselves, and develop their own trading approach and style. In other words, patience is a virtue. “Don’t risk your heart on a roll of the dice,” he adds. “You alone are responsible for your trading decisions.”
Elder said you can and should become your own teacher. “Learn from your own experience. If you keep improving as a trader, the money will follow,” he said.
False Breakouts and Crowd Behavior
Elder talked about the psychology of crowd behavior, and what you can do to avoid the mistakes of the masses when trading. He emphasized traders should not chase a market top or bottom, but look for signals in the charts to indicate real vs. false breakouts. “In front of a live screen, people tend to get very excited. And when people get excited, they do dumb things,” he said.
When a market makes a break to a new low, people instinctively start selling, and when a new high is reached, they start buying. Elder said in most cases that is precisely the wrong thing to do and separates the amateur from the professional. Why? Because most breakouts are false breakouts and not indicative of the real trend, said Elder.
To demonstrate this concept, Elder pulled up a weekly chart of the Dow Jones Industrial Average and reviewed major moves during the past six months. Each move, he said, was ushered in by a false breakout. In October 2004, as the election was approaching, the DJIA broke to a new low for the year. It turned out to be a false breakout, evident by looking at the Moving Average Convergence/Divergence (MACD) histogram. Elder said a shallow bottom was present, indicating bears were getting weaker, not stronger. In March 2005, the market broke above its December high, a new record high for the bull market that began in 2003. Then it pulled back into a range. In November and December 2004, the MACD histogram was high, indicating bulls were strong as prices were making new highs. But that wasn’t the case in March; the histogram was much lower and indicative of a bearish divergence. What happened next? The market fell to a new low for the year this spring. “People like buying uptrends and shorting downtrends. But you should be skeptical, look at the MACD histogram to see if the breakout is accompanied by divergence,” Elder said.
A Look at Agricultural Markets
Elder said he likes to look at various time frames in analyzing markets, and took a look at recent chart patterns in wheat, corn and soybeans. He plotted the wheat market “explosion” higher in February/March, and more recent move lower. He felt the short-term decline isn’t over yet in this market with a longer-term bullish outlook. “Count me as a bull in wheat, but not ready to buy yet,” said Elder.
Turning to corn, he points to similar trends and outlined chart patterns indicative of a bearish divergence. “It’s a young bull market that had its first rally, and is looking for a footing in a second rally,” he said.
Soybeans are a trickier market to trade with more volatile patterns, said Elder. But he felt all grain markets were showing bullish divergences that propelled them higher in late winter, and retracing back to value in early spring. He said supply issues are what creates “fast and furious” price action, and what traders should be closely watching for a second leg-up in these grains markets.
U.S. Dollar-Turning a Corner?
The U.S. dollar has been stuck in a downward spiral for some time, but perhaps a turn is finally taking place. Elder said he was a dollar bear for a very long time, but feels perhaps it’s time shift gears. He said the U.S. administration had put the dollar’s woes “on the backburner,” but now, they are going to “goose it up, and goose it up good.” He said the dollar is rising because interest rates are rising. In March, the Federal Reserve continued its series of interest rate increases began in June 2004, bringing the key short-term interest rate up to 2.75 percent. Elder calls it “painful medicine” to fix some economic ailments that is likely to continue.
Oil Market Outlook
In the long-term, Elder said he wouldn’t be surprised if crude oil prices topped $100 a barrel. Is it time to consider a hybrid car? Elder felt in the short-run, crude oil is going to bounce around and correct back a bit as it hovers around $50. For now, he’s standing on the sidelines in this volatile market. We aren’t likely to run out of oil, but there will be shortages that will create some intense long-term pressure, he said. “The big picture is up, up and away.”
Elder cautions his opinions given in these presentations can quickly change as conditions change, so traders should use the information for their own education and decision-making process, not necessarily for trading ideas.
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