Ask Colin

I have read Alexander Elder's book Trading for a living with great interest. I notice that he suggests that shares should be bought around FAIR VALUE at between the 22 and 30 day SMA. I think that you are also an advocate of this method. Most Buy signals are produced by a stock breaking out of a range or continuing a trend. The problem is that most of the time this then greatly exceeds the 22 day SMA in price. Does one: 1. Ignore fair value and bid the market price or 2. Does one bid the 22 day price and hope for the best that a retracement will allow one to pick up the shares?

I have read Alexander Elder's book Trading for a living with great interest. I notice that he suggests that shares should be bought around FAIR VALUE at between the 22 and 30 day SMA. I think that you are also an advocate of this method. Most Buy signals are produced by a stock breaking out of a range or continuing a trend. The problem is that most of the time this then greatly exceeds the 22 day SMA in price.

Does one:

1. Ignore fair value and bid the market price or

2. Does one bid the 22 day price and hope for the best that a retracement will allow one to pick up the shares?

If you read the last lines in the book, you will realise that Dr Elder reserved the right to improve his methods. I have been at several of his recent camps and I have never heard him say that uses the 30-day SMA. Indeed, I am surprised that you found reference to SMA (Simple Moving Average) in the book as his method, because he is so strong there and since on the superiority of EMA (Exponential Moving Average). The only entry system I have heard him expound is based on the 22-day EMA.

You are right that strong markets often swing way above the 22-day EMA. This is when prices have got right away from the consensus of value. This is where the amateurs buy. The only basis for buying away from the 22-day EMA is what Dr Elder calls the "greater fool theory" - that you hope later to sell it at a higher price to a greater fool that yourself.

So, what he does is place buy orders near the 22-day EMA and wait for the market to come back to that level. You need to revise the price each day as the EMA moves. Dr Elder describes this as being like fishing - you put out a number of lines and then wait for the fish to bite. If the price does not come back to the 22 day EMA, then you do not trade that stock and look for other opportunities at fair value.

Most people have trouble with this system. Our modern society is based on instant gratification. We are impatient to wait for anything - if you drive on our roads, you will know what I mean. They also lack any discipline. This is why most people fail at trading and investing. However, the great traders and investors all display two traits - patience and discipline. That is why they succeed.

By the way, more stocks than you think do come back to the 22-day EMA. Here is a good example:

From January, I count Nine buying opportunities so far. Some you would have been stopped out of at a loss. It just needed patience and discipline.

The other point that I would make is that this is only one method of trading the markets. There are lots more. If you find this one is not comfortable for you, you need to find a method that is and test it thoroughly to make sure it works.

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