Dr Alexander Elder

Updated: May 25, 2021

Trade Management - How To Sell and Take Profits



Hello and welcome back.

In this review we look at another Dr Alexander Elder book, The New Sell and Sell Short, with particular focus on taking profits and cutting losses.

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Dr Elder is a professional trader and psychiatrist, he puts focus onto three areas: Technical analysis, Psychology, and risk management. Without all three of these you are arguably destined to fail.

There is also discussion on what Dr Elder describes as the Three Great Divides in trading, he classes them as:

Technical vs Fundamental analysis

Trend vs Counter Trend

And Discretionary vs Systematic trading.

Dr Elder himself says his strategy is predominantly discretionary, based on technical analysis and is generally counter trend, although appreciates an argument can be made for any combination. My strategy for example includes elements of each, other than counter trend, but all equally have their own merits.

Dr Elder looks at each of the following technical aspects when considering a trade, and suggests trying to keep to five or less criteria. “More is less, anymore just causes confusion”.

Let us look at some of this criterion and how Dr Elder uses them to trade stocks.

First we look at the use of the exponential moving averages. Dr Elder uses both the 13 period and the 26 period for each average.

The exponential moving average is preferred over the simple moving average because it places more emphasis on the most recent set of price data. The simple moving average on the other hand, places equal weighting across all the price points within the data set being measured.

My preference also lies with the exponential averages, purely because there is more significance in the most recent price data.

Dr Elder places both the 13 and 26 period EMA onto every chart, and calls the space in between each EMA the Value Zone. He says:

“When prices dip into the zone between the two lines during an uptrend, they identify good buying opportunities”.

He provides a working example in the book, which shows the buying opportunities at points A. Also suggesting that any move too far away from the value zone should be considered overbought, seen at point B.

As you may expect, Dr Elder suggests overbought prices would be a good time to sell your position, therefore this point B area becomes a sell zone. The sell zone is simply a channel (or envelope) drawn parallel to the moving averages or value zone. However the trigger to sell would be at the first failed attempt of a new high. Likely to be at these points throughout the upward trend.

To recap, he buys in the value zone, creates an overbought zone parallel to the moving average line, waits for price to reach the zone, and sells at the first failure of a new high.

Dr Elder aligns this theo