A classic book on trading re-issued
Alexander Elder grew up in former Union of Soviet Socialist Republic (USSR), hated the system, and longed to escape. But emigration was impossible. He entered college at 16, graduated from medical school at 22, completed his residency and became a doctor on a ship. When the Soviet vessel berthed in Abidjan, Ivory Coast, he jumped ship and ran straight to the United States embassy, with his crew-mates hotly chasing him through the narrow, clogged and dusty streets. The embassy put him up in a safe house and then on a flight to New York. He landed at the Kennedy Airport in February 1974, arriving with $25 in his pocket. Elder spoke a smattering of English but did not know a soul in America. The last thing he knew was stocks, bonds and commodities, futures and options.
In the summer of 1976, when he was a first-year resident of psychiatry, Elder drove from New York to California, packing in his old Dodge car, a few books on psychiatry, several books on history and also a paperback copy of How to Buy Stocks by Louis Engel and Brendan Boyd, a dog-eared paperback borrowed from a lawyer friend.
The book changed the course of Elder’s life. Elder says he gulped down the book in campgrounds across America, finishing it on a Pacific beach in La Jolla, California. When he returned to New York, Elder bought his first stock and a terrible thing happened: he made money! Worse, he made money even in his second trade, entrenching in his mind the idea that it’s just so easy to make money in stocks. It took Elder multiple losses and two years to get rid of this overconfidence bias that easily sets in when you make money from stock trading.
Elder continued to practise psychiatry but came to be known as a professional trader—and a trainer of traders. Since successful investing and, more so, trading, is a first a game of the mind, Elder’s technical expertise in psychiatry provided him with great insights into psychology of trading, which he applies in ‘Traders’ Camps’—week-long classes for traders. Elder is the author of many books on trading but Trading for a Living, which first appeared in 1993, is a classic and an international bestseller. Now, 21 years later, Elder has come out with a revised edition. It is almost a new book.
The book explains the three crucial pillars on which successful trading rests—psychology, trading system, and money management—as well as the factor that ties them together: honest record-keeping. The first two chapters are devoted to individual psychology and mass psychology. The next six chapters are devoted to trading tactics—classical chart analysis, computerised technical analysis, volume and time, general market indicators, trading systems, and trading vehicles.
The ninth chapter, probably the most crucial one, is devoted to risk management. There is a saying that the best of systems won’t work if it cannot control risk while the worst of the system will profit if proper risk management is followed. 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.”
The first rule prohibits the trader from risking more than 2% on any single trade, a strategy also underlined by successful trader Victor Sperandeo, also known as Trader Vic. The second prohibits the trader from launching any new trades for the rest of the month when his losses for the current month exceed 6% of his account equity.
The 10th chapter is devoted to “Practical Details” like how to set profit targets of stops and chapter 11 to record-keeping. “Technically trading isn’t very hard. Psychologically, it’s the hardest game on the planet.” The New Trading for a Living is an excellent compass to help you steer through the tough terrain.