Key Takeaways
1. Master your psychology to succeed in trading
"Psychology is important. Since I was actively practicing psychiatry while writing the original Trading for a Living, its psychology part stood the test of time and I changed it very little in this new edition."
Emotional control is crucial. Trading success depends heavily on managing your emotions and avoiding impulsive decisions. Recognize common psychological pitfalls such as:
- Fear and greed driving irrational behavior
- Overconfidence after a winning streak
- Denial and stubbornness during losing periods
To improve your trading psychology:
- Develop a written trading plan and stick to it
- Keep a trading journal to track and analyze your decisions
- Practice mindfulness and stress management techniques
- Seek support from other traders or a mentor
2. Understand market dynamics and crowd behavior
"Markets are like pumps that suck money out of pockets of the poorly informed majority and into the wallets of a savvy minority."
Markets reflect mass psychology. Prices are driven by the collective emotions and decisions of market participants. Understanding crowd behavior can give you an edge:
- Trends are fueled by the emotions of the masses
- Extreme sentiment often precedes market reversals
- Contrarian thinking can lead to profitable opportunities
Key concepts to grasp:
- Support and resistance levels
- Trend identification and following
- Market cycles and seasonality
- The role of volume in confirming price movements
3. Apply technical analysis tools effectively
"Computerized technical analysis is more objective than classical charting. You can argue whether support or resistance is present—but there can be no argument about an indicator's direction."
Use a combination of indicators. No single indicator is perfect, so combine multiple tools to confirm signals and reduce false positives. Popular technical analysis tools include:
- Moving averages
- MACD (Moving Average Convergence Divergence)
- RSI (Relative Strength Index)
- Stochastic oscillator
Best practices for technical analysis:
- Focus on multiple timeframes for a comprehensive view
- Look for convergence/divergence between indicators and price
- Don't over-optimize indicators on historical data
- Regularly review and adjust your analysis techniques
4. Implement risk management strategies
"The Two Percent Rule prohibits you from risking more than 2% of your account equity on any single trade."
Preserve capital to stay in the game. Effective risk management is crucial for long-term trading success. Key risk management principles include:
- The 2% Rule: Limit risk per trade to 2% of account equity
- The 6% Rule: Stop trading if monthly losses reach 6% of equity
- Position sizing based on account size and risk tolerance
- Diversification across multiple trades and asset classes
Risk management techniques:
- Use stop-loss orders consistently
- Scale into and out of positions
- Adjust position sizes based on market volatility
- Regularly review and rebalance your portfolio
5. Develop a robust trading system
"A system is a set of rules for finding, entering, and exiting trades. Every serious trader has one or more systems."
Consistency is key. A well-defined trading system helps remove emotion from decision-making and provides a framework for consistent results. Elements of a good trading system:
- Clear entry and exit rules
- Risk management guidelines
- Position sizing criteria
- Performance tracking and analysis
Steps to develop your system:
- Define your trading style and goals
- Backtest your strategy on historical data
- Paper trade to validate real-world performance
- Continuously refine and adapt your system
6. Choose the right trading vehicles
"Whichever group you select, make sure your trading vehicle meets two essential criteria: liquidity and volatility."
Match vehicles to your strategy. Different trading vehicles offer various advantages and risks. Consider factors such as:
- Stocks: Ownership in companies, diverse options
- ETFs: Diversified exposure, lower costs
- Futures: High leverage, 24-hour markets
- Options: Limited risk, complex strategies
- Forex: High liquidity, 24-hour trading
Key considerations:
- Liquidity: Ability to enter and exit positions easily
- Volatility: Price movement needed for profit opportunities
- Transaction costs: Commissions, spreads, and fees
- Your expertise and comfort level with the instrument
7. Set profit targets and stop-loss orders wisely
"Write down your entry level, profit target, and stop for every planned trade in order to compare your risk and reward. Your potential reward should be at least twice as big as your risk."
Plan your trades in advance. Setting clear profit targets and stop-loss levels helps manage risk and emotions during trades. Consider:
- Support and resistance levels for targets and stops
- Risk-reward ratios (aim for at least 2:1)
- Trailing stops to protect profits
- Time-based exits for range-bound markets
Best practices:
- Use technical analysis to identify logical exit points
- Avoid placing stops at obvious levels
- Be willing to take partial profits as trades move in your favor
- Regularly review and adjust your exit strategies
8. Continually educate yourself and adapt
"You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody. This is the life of a successful trader."
Never stop learning. The markets are constantly evolving, and successful traders must adapt. Commit to ongoing education and improvement:
- Study market history and patterns
- Stay informed about economic and geopolitical events
- Learn from your trades through careful analysis
- Explore new strategies and technologies
Ways to continue your education:
- Read trading books and financial publications
- Attend trading seminars and webinars
- Join trading communities and forums
- Regularly review and analyze your trading performance
Last updated:
FAQ
What's The New Trading for a Living about?
- Comprehensive Trading Guide: The book serves as a detailed resource for traders, covering essential topics such as psychology, discipline, trading tools, risk control, and trade management.
- Focus on Psychology: It emphasizes the psychological aspects of trading, explaining how emotions like fear and greed can impact decision-making and trading performance.
- Practical Strategies: Dr. Alexander Elder provides practical strategies and systems, including the Triple Screen Trading System, to help traders make informed decisions.
Why should I read The New Trading for a Living?
- Expert Insights: Written by Dr. Alexander Elder, a seasoned trader and psychiatrist, the book combines psychological insights with trading strategies, making it unique and valuable.
- Structured Learning: The book is structured to guide readers from basic concepts to advanced trading techniques, making it suitable for both beginners and experienced traders.
- Real-World Applications: It includes practical advice and real-world examples, helping readers apply the concepts to their trading practices effectively.
What are the key takeaways of The New Trading for a Living?
- Risk Management is Crucial: The book emphasizes the importance of risk management, introducing the 2% Rule to limit losses and the 6% Rule to manage monthly drawdowns.
- Psychological Discipline: It highlights the need for psychological discipline in trading, encouraging traders to manage their emotions and stick to their trading plans.
- Multiple Timeframe Analysis: Elder advocates for using multiple timeframes in analysis, particularly through the Triple Screen Trading System, to make more informed trading decisions.
What are the best quotes from The New Trading for a Living and what do they mean?
- "Emotional trading is lethal.": This quote underscores the dangers of allowing emotions to dictate trading decisions. It serves as a reminder to maintain discipline and objectivity.
- "You can succeed in trading only if you handle it as a serious intellectual pursuit.": This emphasizes the need for a thoughtful and analytical approach to trading, rather than treating it as a game of chance.
- "A trader must support his broker and the machinery of exchanges before he collects a dime.": This highlights the inherent costs of trading, such as commissions and slippage, which can erode profits if not managed properly.
How does The New Trading for a Living address trading psychology?
- Understanding Emotions: The book delves into the psychological aspects of trading, explaining how emotions like fear and greed can lead to poor decision-making.
- Discipline and Control: It stresses the importance of discipline in trading, encouraging traders to stick to their plans and avoid impulsive decisions based on emotions.
- Self-Assessment Tools: Elder provides self-assessment tools, such as a psychological self-test, to help traders evaluate their readiness and emotional state before trading.
What is the Triple Screen Trading System in The New Trading for a Living?
- Three Screens for Trading: The Triple Screen Trading System involves analyzing three different timeframes: a long-term chart for trend direction, an intermediate chart for timing, and a short-term chart for entry points.
- Combining Indicators: It combines trend-following indicators on long-term charts with counter-trend oscillators on intermediate charts, allowing traders to filter out false signals.
- Strategic Decision Making: By starting with the long-term trend, traders can make strategic decisions that align with the overall market direction, increasing the likelihood of successful trades.
What are the 2% and 6% Rules in The New Trading for a Living?
- 2% Rule: This rule limits the maximum risk on any single trade to 2% of the trader's account equity, helping to prevent significant losses.
- 6% Rule: This rule prohibits opening new trades if the total losses for the month, combined with the risks of open trades, reach 6% of the account equity, encouraging traders to step back during losing streaks.
- Risk Management Framework: Together, these rules create a framework for effective risk management, ensuring traders protect their capital and maintain long-term viability in the markets.
How does Dr. Elder suggest managing risk in trading?
- Two Percent Rule: Dr. Elder introduces the "Two Percent Rule," which states that a trader should never risk more than 2% of their total account on a single trade. This helps protect capital and allows for long-term survival in the market.
- Setting Stops: The book discusses the importance of placing protective stops to limit potential losses. Traders should determine their stop-loss levels before entering a trade to avoid emotional decision-making.
- Emotional Awareness: Understanding the psychological aspects of risk management is crucial. Dr. Elder emphasizes that emotions can cloud judgment, leading to poor risk management decisions.
What is the Impulse System described in The New Trading for a Living?
- Market Movement Analysis: The Impulse System uses two indicators—an exponential moving average (EMA) for inertia and the MACD-Histogram for power—to assess market movements.
- Color-Coded Signals: It colors price bars based on the relationship between these indicators: green for bullish, red for bearish, and blue for neutral, guiding traders on when to enter or exit trades.
- Censorship Approach: Rather than providing direct buy/sell signals, the Impulse System acts as a censorship tool, prohibiting trades that go against the prevailing market trend.
What are kangaroo tails, and how are they used in trading as per The New Trading for a Living?
- Definition of Kangaroo Tails: Kangaroo tails are a specific chart pattern characterized by a tall bar flanked by two smaller bars, indicating a potential reversal. They signal that the market has rejected a certain price level.
- Trading Signals: An upward-pointing kangaroo tail suggests a failed bullish attempt, signaling a potential sell opportunity. Conversely, a downward-pointing kangaroo tail indicates a failed bearish attempt, suggesting a potential buy opportunity.
- Importance of Context: Dr. Elder emphasizes that kangaroo tails should be analyzed within the context of the overall market trend. They are more reliable when they occur at significant support or resistance levels.
How can I improve my trading discipline as suggested in The New Trading for a Living?
- Set Clear Rules: Establishing clear trading rules and sticking to them is essential for maintaining discipline and avoiding impulsive decisions.
- Keep a Trading Journal: Documenting trades, including the rationale behind each decision, helps traders reflect on their performance and learn from mistakes.
- Regular Self-Assessment: Conducting regular self-assessments, such as the psychological self-test mentioned in the book, can help traders gauge their readiness and emotional state before trading.
What is the significance of record-keeping in trading as discussed in The New Trading for a Living?
- Learning from Mistakes: Keeping detailed records of trades allows traders to analyze their performance, identify patterns, and learn from both successes and failures.
- Enhancing Discipline: A well-maintained trading journal promotes discipline by encouraging traders to follow their plans and reflect on their decisions.
- Tracking Progress: Regularly reviewing trade records helps traders track their progress over time, providing insights into their trading strategies and areas for improvement.
Review Summary
The New Trading for a Living is highly praised as an essential resource for traders of all levels. Readers appreciate Elder's insights on trading psychology, risk management, and technical analysis. The book provides practical strategies and tools, with a focus on the importance of discipline and record-keeping. While some find certain sections repetitive, many consider it a comprehensive guide that offers valuable wisdom for both beginners and experienced traders. The book's clear explanations and real-world examples make complex concepts accessible, earning it strong recommendations from readers.
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