Alexander Elder's Trading for a Living - Question

[SuperGreenT]

Good afternoon all,

Currently reading this book and it is providing a great deal of 'food for thought'.

There are some assertions in the book that I am curious about:

"The opening price of a daily or a weekly bar usually reflect the amateurs' opinion of value"

"The closing prices of daily or weekly bars tend to reflect the actions of professional traders"

"If prices closed higher than they opened, then market professionals were probaby more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs"

Given that Elder wrote the book was written in 1993, do you believe these still hold true in a trading world where people work around the clock, online, from anywhere. I can see that 20 years ago when amateurs were reliant on newspapers for their information and phone calls to their brokers to make trades that this would definitely be true. But, now the gap in capabilities (eg. access to information and ability to trade) between amateurs and professionals has narrowed and this might reduce the accuracy of the above statements.

Everyone's thoughts are appreciated.

Thanks

 

[CanOz]

Interesting question...

I think you really should ask the man himself at Elder.com, i'm pretty sure he would answer, just let him know you actually bought his book.

I've actually got that audio book, great stuff. I like the way he's always thinking about the participants psychology, right up his alley.

Curious as to his answer...please let us know.


CanOz

 

[tech/a]

I find that a meaningless statement

Your meant to or should trade like a professional.
They get it wrong as often as you and I.

 

[banco]

Good afternoon all,

Currently reading this book and it is providing a great deal of 'food for thought'.

There are some assertions in the book that I am curious about:

"The opening price of a daily or a weekly bar usually reflect the amateurs' opinion of value"

"The closing prices of daily or weekly bars tend to reflect the actions of professional traders"

"If prices closed higher than they opened, then market professionals were probaby more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs"

Given that Elder wrote the book was written in 1993, do you believe these still hold true in a trading world where people work around the clock, online, from anywhere. I can see that 20 years ago when amateurs were reliant on newspapers for their information and phone calls to their brokers to make trades that this would definitely be true. But, now the gap in capabilities (eg. access to information and ability to trade) between amateurs and professionals has narrowed and this might reduce the accuracy of the above statements.

Everyone's thoughts are appreciated.

Thanks

In terms of volume I suspect professionals swamp amateurs (retail traders) in just about every market.

 

[notting]

"The opening price of a daily or a weekly bar usually reflect the amateurs' opinion of value"

"The closing prices of daily or weekly bars tend to reflect the actions of professional traders"

I find that If a stock is consistently closing at the higher end of the days bar it tends to indicate strength.
And the reverse to be so.

Also if a stock has a really good week then it will tend to have a soft opening on the Monday morning, but if the opening on the Monday morning is also strong following a strong week it's very bullish.

 

[tech/a]

I find that If a stock is consistently closing at the higher end of the days bar it tends to indicate strength.
And the reverse to be so.

Also if a stock has a really good week then it will tend to have a soft opening on the Monday morning, but if the opening on the Monday morning is also strong following a strong week it's very bullish.

You describing a trend.

 

[Gringotts Bank]

In terms of volume I suspect professionals swamp amateurs (retail traders) in just about every market.

I believe this also. I try never to place myself in the depth queue where I can be 'seen'. I buy and sell at market whenever possible.

I agree with tech too. If the pros made big returns, then we would want to emulate them, but on average they don't do very well. Have a look at the managed funds' returns for 2012. Mostly they just manage to mirror the index, (whilst taking a big helping of cream off the top to fund their extravagant lifestyles).

 

[Garpal Gumnut]

I believe this also. I try never to place myself in the depth queue where I can be 'seen'. I buy and sell at market whenever possible.

I agree with tech too. If the pros made big returns, then we would want to emulate them, but on average they don't do very well. Have a look at the managed funds' returns for 2012. Mostly they just manage to mirror the index, (whilst taking a big helping of cream off the top to fund their extravagant lifestyles).

+1

gg

 

[notting]

You describing a trend.

I suppose you could call it a short term sense of strength or weakness, being supportive of a probable emerging or continuing trend.

 

[wayneL]

Good afternoon all,

Currently reading this book and it is providing a great deal of 'food for thought'.

There are some assertions in the book that I am curious about:

"The opening price of a daily or a weekly bar usually reflect the amateurs' opinion of value"

"The closing prices of daily or weekly bars tend to reflect the actions of professional traders"

"If prices closed higher than they opened, then market professionals were probaby more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs"

Given that Elder wrote the book was written in 1993, do you believe these still hold true in a trading world where people work around the clock, online, from anywhere. I can see that 20 years ago when amateurs were reliant on newspapers for their information and phone calls to their brokers to make trades that this would definitely be true. But, now the gap in capabilities (eg. access to information and ability to trade) between amateurs and professionals has narrowed and this might reduce the accuracy of the above statements.

Everyone's thoughts are appreciated.

Thanks

Professional what?

Fund managers?

Day traders?

Quants?

Market Makers?

Etc?

Such generalizations are BS IMO, FWIW.

 

[skc]

Good afternoon all,

Currently reading this book and it is providing a great deal of 'food for thought'.

There are some assertions in the book that I am curious about:

"The opening price of a daily or a weekly bar usually reflect the amateurs' opinion of value"

"The closing prices of daily or weekly bars tend to reflect the actions of professional traders"

"If prices closed higher than they opened, then market professionals were probaby more bullish than amateurs. If prices closed lower than they opened, then market professionals were probably more bearish than amateurs

I like your attitude. Question everything younread and don't take it as gospel. The biggest mistake many new traders make is to take apply what they read rather than testing what they read with reason and market observations.

As to my thoughts on the subject matter... I am aware of professional traders who avoids the open so they can better read the flow of the day, but I also know some professional traders who likes to trade the open because that's where the most mis-pricing happens.

You can argue that the mis-pricing on open happens because of amateurs, but you would be giving the 'professionals' too much credit. They are just as likely to mis-price something and when they do they create even bigger impact.

I do have a theory though... Say a fund manager wants to sell 2m shares and instructs his broker to do so. The broker would consider a job well done if he can achieve or slightly beat the VWAP for the day. He doesn's need to be the hero and trade on the open and risk getting it wrong, he may be better off letting the morning traffic pass through, establish a vwap baseline and dribble out his size through the day. If he has some amount left by the end of the day, he might have little choice but to work it all in the close, hopefully meeting a buyer with similar needs.

This probably only applies to stocks without obvious major news, however. With news and events, the quickest person to interpret such correctly are the winners. And they can be non-professinals esp in the specie end of the market.

 

[Garpal Gumnut]

I like your attitude. Question everything younread and don't take it as gospel. The biggest mistake many new traders make is to take apply what they read rather than testing what they read with reason and market observations.

As to my thoughts on the subject matter... I am aware of professional traders who avoids the open so they can better read the flow of the day, but I also know some professional traders who likes to trade the open because that's where the most mis-pricing happens.

You can argue that the mis-pricing on open happens because of amateurs, but you would be giving the 'professionals' too much credit. They are just as likely to mis-price something and when they do they create even bigger impact.

I do have a theory though... Say a fund manager wants to sell 2m shares and instructs his broker to do so. The broker would consider a job well done if he can achieve or slightly beat the VWAP for the day. He doesn's need to be the hero and trade on the open and risk getting it wrong, he may be better off letting the morning traffic pass through, establish a vwap baseline and dribble out his size through the day. If he has some amount left by the end of the day, he might have little choice but to work it all in the close, hopefully meeting a buyer with similar needs.

This probably only applies to stocks without obvious major news, however. With news and events, the quickest person to interpret such correctly are the winners. And they can be non-professinals esp in the specie end of the market.

Do you have any evidence for this theory skc.

I'm not saying you are wrong.

But evidence?

gg

 

[boofis]

If the pros made big returns, then we would want to emulate them, but on average they don't do very well. Have a look at the managed funds' returns for 2012...

What are you using to measure big vs. small returns? % ?

 

[skc]

Do you have any evidence for this theory skc.

I'm not saying you are wrong.

But evidence?

gg

No firm evidence GG. The notion of a broker's performance being measured by achievement / closeness to the VWAP is anecdotal only.

The rest of it are just logcial rationalisation of how I might execute orders if I was in their shoes. Since I don't work as a broker executing insto orders, I could be way off.

 

[tech/a]

No firm evidence GG. The notion of a broker's performance being measured by achievement / closeness to the VWAP is anecdotal only.

The rest of it are just logcial rationalisation of how I might execute orders if I was in their shoes. Since I don't work as a broker executing insto orders, I could be way off.

I think they would be more likely closing out at a price rather than at a timeline.

 

[Trembling Hand]

but you would be giving the 'professionals' too much credit. They are just as likely to mis-price something and when they do they create even bigger impact.

 

[Trembling Hand]

I think they would be more likely closing out at a price rather than at a timeline.

Nah they just get the call do X amount of business by this time....day, week, end of quarter etc.

 

[sinner]

Do you have any evidence for this theory skc.

I'm not saying you are wrong.

But evidence?

gg

VWAP was until recently the commonly accepted strike price for "institutional size" in almost every electronically traded instrument these days. This is largely due to its percieved "price efficiency", it's a more realistic representation of a price in time than fixing prices (still used as a common strike in FOREX and PM markets).

These days it's more like this:
http://www.thetradenews.com/news/Trading___Execution/Algorithmic_Trading/VWAP__down_but_not_out.aspx

“More and more traders are being given discretion to change strategies halfway through an execution,” says Rob Boardman, head of algorithmic sales at agency broker ITG. “They are not after an average, they are trying to beat everybody else and they are trying to impress with execution quality.”

I think if nobody of size was using VWAP then you would see a lot fewer technical reactions to the VWAP level. But you do see it a lot, even in very big markets, along with an increase in avg trade size it's a good indication that it's still in use as a tool for executing size.

=======================

To the OP: Personally, I think the Elder maxim still holds largely true (although it's not like he invented the idea?), daily and weekly closing prices represent a more informed price than opens, with markets that have closing prices influencing 24H markets to have the same phenomenon. I want to see where the price closes, in relation to the days high and low, in relation to the price a week/month/quarter ago, in absolute relation to the distance between yesterdays closing price, etc.

The simplest example I can think of is gaps in asset class instruments (e.g. QQQ, not AAPL). In the majority of asset classes, gaps are mean reverting rather than momentum natured. i.e. a gap is statistically more likely to close than runaway. This indicates that discontinuous moves away from a closing price are (statistically) less informed, such that trading price levels often return to the informed price instead of continuing away from it. Traders of the gap know that the open price is less informed, and make a bet to see the price return to a more informed level.

 

[CanOz]

+1....

VWAP and 1 STD on the NK....

But you do see it a lot, even in very big markets, along with an increase in avg trade size it's a good indication that it's still in use as a tool for executing size

....ya reckon?

The simplest example I can think of is gaps in asset class instruments (e.g. QQQ, not AAPL). In the majority of asset classes, gaps are mean reverting rather than momentum natured. i.e. a gap is statistically more likely to close than runaway. This indicates that discontinuous moves away from a closing price are (statistically) less informed, such that trading price levels often return to the informed price instead of continuing away from it. Traders of the gap know that the open price is less informed, and make a bet to see the price return to a more informed level.

Great explanation....