Alexander ElderTrader Interview: Dr. Alexander Elder

Pod Chats: Dr. Alexander Elder on Stages of a Trader

Trend Following Radio Episode 57: Dr Alexander Elder. Click above to listen to the full episode.

Dr Alexander Elder is a Russian-American trader and trading teacher. His 1993 book, Trading for a Living, is an international best-seller having been translated into over a dozen languages, considered a true trading bible.

A former psychiatrist, his experience in this field gives him a unique insight into the psychology of trading.

In this 2012 discussion with Michael Covel in episode 57 of Trend Following Radio, Dr Elder discusses his perilous journey to America, his psychiatric background, his thoughts on trader development and outlines his stages of a trader.

Read below for some extracts from the interview, or listen to the full episode here...

You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybodyDr. Alexander Elder

On arriving to America...

There is a book that Stanford University put out called The KGB Wanted List. I'm in that book twice. KGB tried to catch me and to kill me. Obviously they failed at that job. But when I was kid, when I was in college - I went early; I went to medical school at 16 - I got political very early on and I really hated the communist system. I hated it so much that by the time I was in my late teens, I would not go out of the house on national holidays because they would have red flags out, and it would disgust me to walk under those flags.

So I got involved in politics. Gradually my friends started going to prisons, and there was no question in my mind that that was where I was going to end up. I realised I didn't love that country enough, that considered me a second class citizen anyway, I didn't love the country enough to go to prison for it.

So I got a job out of medical school, I did my residency in psychiatry, and then I got a job on a ship of all places as a ship's doctor. One day when the ship was in Africa, I put on my running shoes and got going, with the rest of the crew in hot pursuit, because nobody was allowed to go onshore alone. I was on the ship for two months prior to this run, and we were in Africa. When the sun came down it wasn't so hot, I would go to the upper deck and skip rope for two hours. When the time came, I wasn't the biggest or strongest man on the trip, but I was the one in best shape, so when it came to running, nobody caught me. I broke away from my pursuers, got a taxi and had them take me to the US embassy.

On using psychiatry to get into trading...

Psychiatry made me into who I am, and when I came to New York, I got accepted into the Albert Einstein program in New York, which at the time was the best residency in the city. And then I got a job in psychiatry developing my own practice. But when I got into my mid-thirties, I felt that I was as good as people get that it was no longer a huge adventure. I was looking for something to get involved in, and meanwhile I was trading a little on the side. I wouldn't call it trading, it was gambling, I really didn't know anything. But trading fascinated me, I would have a $3,000 account, then I would bust it out, go back to work and put some money together again and open a $5,000 account, until I finally figured out the game. It took many years.

And I find that a high degree of formal education is a negative when it comes to trading. Having a higher education is a hindrance not help in trading. But in any case I overcame this hindrance of the game. People often ask, what do psychiatry and trading have in common? Well they are both based in reality. You look at the chart and you're trying to see what you really want to see there. But the chart is doing what it's doing, do you have the ability to brush away your fantasies and look at the chart with the eyes of a child? Up is up, down is down and sideways is sideways. Without fantasising too much, without saying "that's where it should go". So that's really the parallel between psychiatry and trading.

On the process of trader development...

I feel sorry for some people who read in an advertisement that says you can "triple your money in a year, working 15 minutes a day with no math". That's fantasy life. Somebody who is not looking for magic, but looking seriously to trade, and to become a trader, has to put time and energy into it. I often say to people, learning to be a trader will probably take as long and cost as much as taking a college degree. It's a process. You have to read, acquire knowledge; you have to open a small learning account - like having a bicycle with restraining wheels. You have to practice in a small account and gradually start adding equity to it.

In terms of stages of development, Stage One is when someone is completely new, coming to the markets and just trying to figure out which end is up. During this stage if a person cannot lose more than 10% (a year), then that's wonderful because they are ahead of the game. So as a beginner you should anticipate you will lose some money. Now the idea is to lose as less as possible, to have a small account, to practice very tight money management. In fact one of the worst things that happened to me when I first started, and I knew nothing, was I made money on my first trade and made money on my second trade, after that I got this delusional idea that trading was easy.

On expectation of making money in the first year...

Suppose you decide to become a dentist, you go to dental school. Are you going to make money in the first year of dental school? You can be brilliant, but you're not going to make any money as a dentist. It's going to cost you money. You're going to pay for education, read and study, spend time in the lab etc. If I was a recruiter for dental school and said come and join our school, you're going to be making money in three months of joining us. You would know I am bullshitting you and have some hidden agenda. It's the same way with trading, you're going to learn how to trade, you should anticipate it will take you time.

On trader progression...

Stage Two: you want to outperform a risk-less asset. In other words, you can put your money into the bank and maybe get a couple of percentage there. Can you consistently beat that in your trading? It's surprisingly difficult for a beginner. It's easy to do on a single trade, sure, but over the course of many quarters it's a hard thing to do. Once you are doing that for a few quarters (outperforming) you know that you're in good shape. Now you can start adding capital to your account, step-by-step every few months if this continues to go well. And then you just find out how good you are. That's Stage Three.

On W.D. Gann...

I met W.D. Gann's son about 20 years ago. We had a club here in New York, 'Society for Investigation of Current Events'. And I would say two-thirds of our meetings were market related. So we would have a speaker, have a dinner and hang out a little. This guy came from Boston, his name was Gann. So I was listening to him, he was some sort of bank analyst, and I said to him "are you related to W.D. Gann?". "Oh that was my father". So I say "is it true your father made millions and he flew around on a private plane?". He's says "nahhh".

He was actually angry at his father, because his father could not afford a secretary and this kid wanted to play ball and instead he had to copy all these materials by hand for sale. His father could not make any money trading, could when he was younger but lost his ability, so he was selling manuals. At the time that he died, the value of his estate in the 1950's was a hundred thousand dollars. He wasn't poor but he certainly was very far from rich.

On Money Management...

Money Management is about as needed in trading as a life jacket on a boat. You may be able to go out without a life jacket and come back safely. But if you keep going out long enough without a life jacket, trouble is there. The thing is, markets I believe are fundamentally not predictable.

There are two kinds of causality, dynamic and statistic. Dynamic causality is this: you take a pencil and push it on your desk and which ever way you push it, that pencil is going to go. You apply force and it goes in this direction. That's simple. But statistic causality is if I gave you a box and said there are 20 tennis balls in it and 12 of them are green and 8 of them are yellow, what color would you want to bet on? Of course you will say green. But you know if you put your hand in, there is a possibility that you will pull two, three, four yellow balls in a row. So if you're betting a large fraction of your account with the system and your system is telling you green, by the time the bad run comes to an end, your account is demolished.

So that's why money management is needed, because the stock market doesn't operate on dynamic causation, it operates on statistical causation.

On the notion of writing things down...

Years ago when I was actively practicing psychiatry, as part of history taking I would ask patients about their drinking, and every once in a while you would run into someone who you suspect is an alcoholic, and you would say so to the patient. Some would accept and some would deny. Well if a guy denied that he was an alcoholic, I never argued, I would say I want you to continue drinking exactly the way you drink next week, don't change a thing, but every time you take a drink, I want you to write it down. What you drank and how much. Just come back with the record and we will take a look at it.

And no alcoholic could come back with a complete record; they would just be terrified looking at it. Why? Because people who are engaged in some kind of impulsive self-destructive behaviour, the last thing they want to do is look in the mirror, because creating records creates a mirror of you actions. Moving to trading, most traders just run forward and keep making the same mistakes, month after month and year after year. There is a Russian expression, "don't step on the same rake twice". Keeping records basically creates a breaker mechanism in unproductive, bad, un-useful behaviour. Keeping records makes you alert to yourself.

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Want to listen to Dr Alexander Elder's full interview with Trend Following Radio? Listen here to Episode 57...