Raven316 this was Mugsandcups solution posted on Jan 28 that worked for me. Otherwise I still woiuld be pulling my hair out.
I have figured out what was wrong with my installation. In case anyone else has this problem and is searching for an answer I would like to explain what I did wrong:
When choosing external editor, I picked photoshop elements 11 but what I had actually selected was the shortcut programme launcher, in consequence the programme launched but not the file.
In choosing external editor what must be picked is photoshop elements 11 editor. this (on a mac) is found in - applications > Adobe photoshop 11 > support files.
inside the support files is the icon for elements11 editor which you must choose and not, as I did, the main adobe elements 11 icon in the applications folder.
Hope this saves somebody the hours I spent floundering around seaching for a solution.
Hope it works for you