The new trading for a living

The New

Trading for a Living

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The New

Trading for a

Living

Psychology • Discipline

Trading Tools and Systems

Risk Control • Trade Management

Dr. Alexander Elder

www.elder.com

www.spiketrade.com

Cover design: Paul DiNovo

Copyright © 2014 by by Dr. Alexander Elder. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-44392-7 (Hardcover)

ISBN 978-1-118-96367-8 (ebk)

ISBN 978-1-118-96368-5 (ebk)

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To the memory of Lou Taylor—

a wise man, a savvy trader, and a true friend.

CONTENTS

vii

Preface xiii

Introduction 1

1. Trading—The Last Frontier 1

2. Psychology Is the Key 3

3. The Odds against You 5

ONE Individual Psychology 9

4. Why Trade? 9

5. Reality versus Fantasy 10

6. Self-Destructiveness 16

7. Trading Psychology 19

8. Trading Lessons from AA 21

9. Losers Anonymous 23

10. Winners and Losers 27

TWO Mass Psychology 31

11. What Is Price? 32

12. What Is the Market? 33

13. The Trading Scene 36

14. The Market Crowd and You 39

15. Psychology of Trends 43

16. Managing versus Forecasting 46

THREE Classical Chart Analysis 49

17. Charting 50

18. Support and Resistance 55

viii CONTENTS

19. Trends and Trading Ranges 60

20. Kangaroo Tails 65

FOUR Computerized Technical Analysis 69

21. Computers in Trading 69

22. Moving Averages 74

23. Moving Average Convergence-Divergence:

MACD Lines and MACD-Histogram 80

24. The Directional System 89

25. Oscillators 95

26. Stochastic 95

27. Relative Strength Index 99

FIVE Volume and Time 103

28. Volume 103

29. Volume-Based Indicators 107

30. Force Index 112

31. Open Interest 117

32. Time 121

33. Trading Timeframes 126

SIX General Market Indicators 133

34. The New High–New Low Index 133

35. Stocks above 50-Day MA 139

36. Other Stock Market Indicators 140

37. Consensus and Commitment Indicators 142

SEVEN Trading Systems 149

38. System Testing, Paper Trading, and the

Three Key Demands for Every Trade 151

39. Triple Screen Trading System 154

40. The Impulse System 162

41. Channel Trading Systems 166

EIGHT Trading Vehicles 173

42. Stocks 175

43. ETFs 176

44. Options 178

45. CFDs 186

46. Futures 187

47. Forex 194

CONTENTS ix

NINE Risk Management 197

48. Emotions and Probabilities 197

49. The Two Main Rules of Risk Control 202

50. The Two Percent Rule 203

51. The Six Percent Rule 208

52. A Comeback from a Drawdown 210

TEN Practical Details 215

53. How to Set Profit Targets: “Enough” Is the Power Word 215

54. How to Set Stops: Say No to Wishful Thinking 219

55. Is This an A-trade? 225

56. Scanning for Possible Trades 230

ELEVEN Good Record-Keeping 233

57. Your Daily Homework 234

58. Creating and Scoring Trade Plans 238

59. Trade Journal 243

A Journey without an End:

How to Continue Learning 249

Sources 253

Acknowledgments 257

About the Author 259

Index 261

PREFACE

xi

Trading for a Living was published in 1993 and became an international best seller.

It remains at the top of many reading lists, as friends recommend it to friends and

trading firms give it to their new hires. All these years, I resisted revising my book

because I trusted and liked its internal logic. I traded, traveled, wrote other books,

and taught a few classes. Now, 21 years later, I agreed to update my most popular

book so that you can benefit from the new technologies as well as the lessons I’ve

learned.

My late great friend Lou Taylor, to whom this book is dedicated, used to joke: “If

I get half a percent smarter each year, I’ll be a genius by the time I die.” Revising my

very first book felt like reliving my youth with the benefit of experience.

In planning this update, I thought of a building complex in Vienna, Austria

called the Gasometer. At its core are multistory storage tanks, erected by Austrian

bricklayers in 1927. When modern technology made huge gas cylinders obsolete,

architects converted them into modern apartments. They punched wide openings

in brick walls, creating panoramic views, installed floors and elevators, and added

glass-enclosed penthouses. I used to stay in one of them and wanted my new book to

follow that model of blending old craftsmanship with new technology.

Before you begin reading this book, ask yourself: what’s the single most important

step you can take to become a successful trader?

Psychology is important. Since I was actively practicing psychiatry while writ￾ing the original Trading for a Living, its psychology part stood the test of time and I

changed it very little in this new edition.

Market analysis is very important—but remember that when we look at a chart,

we deal with only five pieces of data—the open, the high, the low, the close and

volume. Piling up masses of indicators and patterns on top of those five values only

increases confusion. Less is often more. If you’ve read Trading for a Living, you’ll see

that I’ve reduced the number of technical chapters and moved some of them into

a downloadable addendum. On the other hand, I added several new chapters that

xii PREFACE

focus on new tools, notably the Impulse system. I also added a section on stops,

profit targets and other practical details.

Money management is extremely important because financial markets are hot￾beds of risk. That was the weakest part of the original book, and I completely

rewrote it. One of many tools you’ll discover will be the Iron Triangle of risk

control.

Psychology, trading tactics, and money management are the three pillars of

success, but there is the fourth factor that ties them together. That factor—which

integrates all others—is record-keeping.

Keeping good records will enable you to learn from your experiences. It’ll help

you break out of the vicious circle of small gains and big losses, running like a squir￾rel in a barrel, sweating and stressed but never getting anywhere. Keeping good

records will make you your own teacher and a better trader. I’ll show you several

types of records you need to keep and will share several of my trade diaries.

If you’re a new reader, welcome to the journey. If you’ve already read Trading for a

Living, I hope you’ll find this new book two decades smarter than the first.

Dr. Alexander Elder

New York–Vermont, 2014

The New

Trading for a Living