Hi, I'm Frederic.

Web Developer & Entrepreneur
blogging about life and programming in Node.js, Go and React.

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[Book Notes] The New Stock Trading For a Living

I recently read this book called The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management by Alexander Elder and a friend of mine asked for some notes on it, so that’s what this blog post is about.

Introduction

The triangle of trading

Trading Triangle

Those 3 main concepts plus the encompassing Learning + Record Keeping are what this books treats about and represents the most important facets of trading for a living.

Dangers

Trading is super hard but also super dangerous. There is no guarantees, nothing stopping you from self destruction.

A few wins in a row will make an inexperienced trader feel like a genius, thinking he figured the stock market out. Correlation is not causation. He’ll then take riskier bets or change his method both avenues leading to loosing everything he gained up till now.

Approach trading as the AA’s (Alcoholics Anonymous)

There are 3 rules of the AA’s you can learn from in regards to trading:

Trading while keeping losses below a business margin (read a maximum number you defined like 6%/month or 2%/trade) is like staying sober. Letting any loss get bigger than that is gambling / getting drunk.

Emotional trading is a luxury nobody can afford.

Rules to become calm expert consistent trader:

  1. Decide that you are in it for the long run. 20+ years.
  2. Learn as much as you can (while keeping a healthy amount of skepticism).
  3. Do not get greedy and rush to trading. Take time to learn. Markets and opportunities will always be there.
  4. Develop a method for analysing markets (“If A happens, then B generally follows”) keeping in mind that markets are multi-dimensional, use multiple analysis techniques. The way you trade might be different in a bull, bear, sideways market.
  5. Define a money management plan. Your primary goal is long term survival. Second goal is steady growth of capital, Third goal is high profits (3rd is not more important than 1st).
  6. The trader itself is the weakest link in any trading system.
  7. Winners think, feel, and act differently than losers. Becoming a professional will require you to change, to evolve (you don’t start out as a winner).

Mass Psychology

In trading you compete against the brightest minds in th world fending off piranhas of commissions and slippage.

Crowds are powerful, they may be dumb at times but don’t go against the trend. If a stock is rallying (read going up) buy or stand aside, don’t sell short because “prices are too high”, mass mania is a thing that happens.

Group thinking exists. Advisers and Guru’s will make you feel like an insider. Group members might catch a few trends but they get killed when the trend reverses. Successful traders are independant thinkers.

Successful trading stands on 3 pillars:

Plan the trade then trade the plan.

Charts

The meaning of a bar chart

Each price is a monetary consensus of value of all market participants expressed in action.

In a bull market Monday and Tuesday are usually down or low rallying up on Thursday and Friday.

In a bear market it’s the opposite. High at the start, lower at the end of the week.

Theories

I touch quickly on those as they are important history but not so practical, read up more on them if you are interested)

Support and Resistance

Support and resistance exists because people have memories.

When the market rallies sharply / quickly:

This goes on until an old/new resistance level is met and bear think the equity is overvalued and bulls see the price as too high for it’s potential gain.

The inverse happens with sharp dips in price, a lot of SELLing leading to sharper decline in price.

Strength of support and resistance is composed of: length (sideways / time), height (compared to other r/s levels) and volume (of interest).

Trading rules for Resistance and Support

  1. Use tighter protective stops when approaching resistance / support line. If the price reverses/bounces you’ll still reap in most of the profit.
  2. Support and Resistance are more important in longterm charts than short term.
  3. Support and Resistance points are trading opportunities.

On placing stops: place them on uneven numbers a bit higher when shorting or lower when long so that the masses using round numbers for stop losses trigger first and potentially reverses the trend, avoiding you exiting with a loss.

False breakouts (read breaking through a resistance or support level) usually have normal volume and don’t affect technical indicators, true breakouts will have huge volume.

The right hand edge

Hindsight is 2020. Spotting trends in historical charts is easy. Unfortunately your broker wont allow you to trade in the past, you trade at the right edge of a chart where everything is more foggy and technical indicators are not as clear. Professional traders know they’ll make mistakes, they cut their losses quick.