Sell & Sell Short

06/01/2008 12:00 am EST

Focus:

Alexander Elder

Author, The New Trading for a Living

Sell & Sell Short

For veteran traders, the name Dr. Alexander Elder is likely a familiar one. His first book, Trading for a Living has become one of the must-reads for someone who is considering trading, and many of his subsequent books have been similarly well received. I first met Alex at the 1983 TAG conference, and our paths have crossed many times since then.

His latest book focuses on selling short, a subject alien to most investors, and a number of traders as well, as evidenced by the lack of shorting during the bursting of the tech bubble in 2000-2002. This book is broken down into three parts, the first of which concentrates on money management, record keeping, and how to buy. These first two topics are often the focus of Alex’s recent work, as the failure to employ strict money management guidelines has caused the early termination of many novice-trading careers. The importance of consistent and detailed record keeping is also a topic that Alex has spent considerable time on recently, since he strongly believes that only through keeping a detailed trading diary can one improve their trading. The first chapter also includes a review of the technical methods used by Dr. Elder, and throughout the book there are sections in green that contain relevant excerpts from his earlier books. In terms of technique, he considers prices in the area between a 13 and 26 period EMA as fairly-valued, and then uses a channel system based on a fraction of the EMA added and subtracted to form the upper and lower channels. Simply put, you should not buy above the value area or sell below it; these precautions will hopefully keep one from chasing a market. Alex’s recommendation for drawing the channel is to create one that encompasses 95% of price values going back a hundred or so periods, with a different coefficient based on the market or even the prevailing trend. With this variability in mind, I respectfully suggest instead the ATR method developed by Manning Stoller in his STARC bands, which doesn’t require the same maintenance and time investment. Buying or selling in terms of momentum is also covered, but he stresses that regardless of whether you trade on value or momentum, “having a written plan for buying or selling will put you miles ahead of your competitors.”

The second part of the book is devoted to selling, and Alex describes three ways to establish a short position: selling at a profit target above the market, selling below the market using a protective stop, and selling before the stock hits a target or protective stop. Each of these methods is covered in a separate chapter with each chapter also including some valuable training on topics such as support and resistance, psychology, and risk control. The Iron Triangle of risk control is explained very well, providing a walkthrough for the process of adjusting your trade size based on the trade risk and the maximum amount your account will allow you to risk on any one trade. This is a solid approach that is used daily by many professional traders. There is also a detailed discussion of stops, in which Alex advises against using “soft stops”, introduces SafeZone stops and reviews the relative merits of parabolic stops.

The final section of the book is titled “How to Sell Short’ and begins with a discussion of the basic tenets of short selling along with the unwarranted fear that some have about selling short. There is an interesting section on the “asymmetry of tops and bottoms” where Alex shares his views that bottoms are generally well defined while tops take longer to form and are more difficult to identify. Because of this Alex suggests that one use smaller positions so that if they are stopped out in the first attempt they will be able to have some risk capital in reserve to short again. There is plenty more well-presented and valuable information in the final chapters, including how he scans for stocks to short, the importance of short interest as well as shorting futures, forex, and options. Sell & Sell Short contains a healthy amount of valuable knowledge, combined with the developed level of insight I’ve come to expect from Alex Elder, and is certain to benefit traders of all experience levels.

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