The New Sell & Sell Short

February 29, 2012 06:00 PM
Book review

The New Sell & Sell Short: How to Take Profits,
Cut Losses, and Benefit from Price Declines
By Dr. Alexander Elder
Wiley Trading, 2011
$39.95, 349 pages

Alexander Elder’s latest offering is actually an updated edition of his 2008 book “Sell & Sell Short,” and the only real changes are the addition of a few chapters on the aftermath of the 2007-2008 market meltdown. One unique aspect of this edition is that Elder includes several dozen questions in the form of a quiz after each section, and provides detailed answers to each. While many readers may simply skip these pages, it may be wise to spend a few minutes on the questions because they serve to further entrench his trading techniques.

Elder’s previous books have gained a tremendous following because his writing is both practical and highly intuitive. One of the basic beliefs held by Elder is that to be successful at trading, you first must be disciplined and organized. He spends the first few chapters of this book hammering this point home and even includes many sample spreadsheet screen shots showing his trading logs. While these chapters may not break any new ground, they are essential for anyone to survive in the difficult profession of trading.

The book then goes on to explain how to sell, meaning exiting existing long positions. Again, maybe not terribly novel, but his insights should be read by anyone who has ever struggled with pulling the trigger on the sell side. Buying is easy; selling can be much more difficult. Elder covers three variations of sell signals: Selling at a target, selling on a stop and what he calls selling on “engine noise.” Target selling is simply using various technical indicators to provide sell targets. Elder favors support lines, moving averages and channels. Selling on a stop is straightforward: Set a stop and sell when it is hit. Elder stresses the importance of using actual market-entered stops as opposed to “mental” stops to keep emotions at bay. Finally, Elder discusses engine noise, which he takes to mean any trade that, for a variety of reasons, fails to materialize according to plan. A similar concept is a time stop, where after a certain period of time, if the trade has not stopped out or hit a target, it is exited. Each of these methods is detailed extensively, using a plethora of colored graphs with annotations.

Following this section, Elder then proceeds to discuss actually selling short. This part of the book also did not present much in the way of novel research or insights, as many of the indicators discussed are common and used by many investors when buying long. Nevertheless, Elder keeps the pace moving through the use of dozens of charts illustrating the various technical divergences and breakdowns he employs. Throughout, he stresses the importance of being disciplined, and trying to control the dueling forces of fear and greed. The book excels when it presents general market precepts, and not so much when it dissects particular market patterns which, frankly, may have been cherry-picked for inclusion in the text. In all fairness to the author, though, he does include many charts where the predicted outcome did not come to pass. This is not a jab at Elder, but rather a caution to a reader of any investment book that uses charts as examples. Keep in mind that these charts are chosen after the fact, and as such may suffer from selection bias.

Elder concludes his book with a short section titled “Lessons of the Bear Market,” wherein he dissects the 2007-2009 bear market in detail. Again, through the use of numerous charts, Elder clearly lays out the various trading signals that occurred over this period. Many of these signals did not conform to the “traditional” interpretation, and at times it appeared that Elder had to over-explain and over-justify the charts to account for the subsequent market moves. This, of course, was an extremely unusual market environment, and many tried-and-true methods failed, so this should not be held against the author, nor does it refute his trading philosophy.

Bruce C. Greig, CFA, CAIA, CMT, is the portfolio manager for Altin Holdings, LLC. Greig has Bachelor’s degrees in statistics and mathematics, and a Master’s degree in finance, all from the University of Michigan.

About the Author
Bruce C. Greig, CFA, CAIA, CMT, is the portfolio manager for Altin Holdings, LLC. Greig has Bachelor’s degrees in statistics and mathematics, and a Master’s degree in finance, all from the University of Michigan.