Monday, October 20, 2014
Elder, The New Trading for a Living
The book explores the three pillars of success—psychology, trading tactics, and money management—as well as the factor that ties them together—record-keeping. And it does so in incisive, sometimes amusing detail. For instance, Elder writes: “Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end.” (p. 6) Or, “When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the piece of wood. You laugh at a monkey, but do you laugh at yourself when you act like him? If the market drops while you are long, you may double up on your losing trade or else flip and go short, trying to get even. … What’s the difference between a trader trying to get back at the market and a monkey kicking a tree stump?” (p. 29)
Elder, a trained psychiatrist, analyzes both individual trader behavior and mass psychology—that is, the behavior of trading masses. In connection with the latter, he suggests that “technical analysis is for-profit social psychology.” (p. 43)
Six chapters are devoted to trading tactics—classical chart analysis, computerized technical analysis, volume and time, general market indicators, trading systems, and trading vehicles. Those traders who have not yet developed their own successful strategies will profit from this balanced, suggestive overview.
But armed with even the best tactics the trader will fail if he does not exercise proper risk management. As Elder writes, “Markets can snuff out an account with a single horrible loss that effectively takes a person out of the game, like a shark bite. Markets can also kill with a series of bites, none of them lethal but combined they strip an account to the bone, like a pack of piranhas. The two pillars of money management are the 2% and 6% Rules. The 2% Rule will save your account from shark bites and the 6% Rule from piranhas.” (p. 202) The first rule prohibits the trader from risking more than 2% of his account equity on any single trade. The second prohibits the trader from opening any new trades for the rest of the month when the sum of his losses for the current month and the risks in open trades reach 6% of his account equity. (p. 208)
Elder sums up the rationale for these two rules: “Putting on a trade is like diving for treasure. There is gold on the ocean floor, but as you scoop it up, remember to glance at your air gauge. The ocean floor is littered with the remains of divers who saw great opportunities but ran out of air. A professional diver always thinks about his air supply. If he doesn’t get any gold today, he’ll go for it tomorrow. He needs to survive and dive again.” (p. 212)
In the final chapter Elder describes what is involved in good record-keeping and illustrates his points with a daily homework spreadsheet, an “Am I ready to trade?” self-test, Trade Apgars to score potential trades, a tradebill to focus on the key aspects of a chosen trade, and suggestions for keeping a trade journal.
“Technically,” Elder writes, “trading isn’t very hard. Psychologically, it’s the hardest game on the planet.” (p. 250) The New Trading for a Living offers sound advice as well as the occasional crutch to make it a bit easier.