Trading For A Living Dr Alexander Elder Book

Trading For A Living Dr. Alexander Elder Book Review 1

n Psychology Individual Mass Psychology n Trading Tactics Classical Chart Analysis Indicator Tools Neglected Essentials – Volume, Time Stock Market Indicators Psychological Indicators Trading Systems n Risk Management Money Management Exiting Trades 2

n Trading is the most dangerous human endeavor, short of war. n Acting out your internal conflicts in the marketplace is a very expensive proposition. n The market does not know that you exist. n There is no easy money in the market. n Learning to trade takes hard work, time, energy and money 3

Psychological Factors This is a man’s game and the odds are against you. n With Commissions and Slippage trading is a Minus Zero Sum Game n Trade with your eyes open n Is it Gambling? Resist the urge to bet. n Beware of Self-Sabotage n Control Self-destructiveness n 4

Trading Lessons From AA n n n A trader being demolished by losses is not much different from an alcoholic. Denial - A loser denies that he has lost control over his course in the market. Rock Bottom – When you admit that you have a personal problem that causes you to lose, you can begin building a new trading life. You can start developing the discipline of a winner. 5

Take Charge of Your Trading Life 1. Decide to be in the market for the long haul – say 20 years from now 2. Learn as much as you can 3. Do not be greedy & rush to trade – take your time to learn 4. Develop a method for analyzing the market – test before using real money – markets change and you need to be able to identify the change 6

Take charge of your trading life 5. Develop a money management plan First is long term survival Second is a steady growth of capital Third is making high profits 6. Beware that a trader is the weakest link in any trading system – so learn how to avoid losses and cut out impulsive trading 7. Learn to think, feel and act like a winner 7

What is Price but Mass Psychology? n What is the Market but a huge crowd of people? n In trading you compete against some of the brightest minds in the world while fending off the piranhas of commission and slippage n The only reason there is money in the markets is that other traders have put it there. The money you want to make belongs to other people who have no intention of giving to you…. n 8

n n n Remember your goal is to trade well, not to trade often Markets do not care about your well being When you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. These decisions are made before you enter a trade. Price is the leader of the market crowd. You must not change your plan while you have an open position! 9

Psychology of Trends n n Technical Analysis is applied social psychology. It aims to recognize trends and changes in crowd behavior in order to make intelligent trading decisions. Read the Market and Manage Yourself - You need to analyze the balance of power between bulls and bears. - You need to practice good money management. - You need personal discipline to follow your trading plan and avoid getting high in the markets. 10

Chart Analysis n n n It pays to trade with the professionals and against the amateurs The highest point of a bar represents the maximum power of the bulls The low of each bar shows the maximum power of the bears The closing tick of each bar reveals who won The distance between the high and low reveals the intensity of the conflict between bulls and bears 11

Technical Analysis Topics n n n Support and Resistance exists because people have memories The Hard Right Edge is extremely difficult to identify trends and trading ranges Should one Trade or Wait? Conflicting Trends in Different Timeframes Trend-lines – note the effects of : angle, length, touches, timeframe, volume The angle between a trend line and the horizontal axis reflects the emotional intensity of the dominant market crowd. 12

More Technical Analysis Gaps – Common, Breakaway, Continuation, Exhaustion n Island Reversal Pattern n Chart patterns – Head & Shoulders (& Inverse), Double Tops & Bottoms n Rectangles n Lines and Flags n Triangles – Ascending, Descending, and Symmetrical n 13

3 Major Indicator Groups Trend Following – coincident or lagging – turns After trends reverse MACD, Directional, On Balance Volume, Advance/Decline, Moving Averages n Oscillators – help identify turning points - are leading indicators, coincident and often turn ahead of prices n 14

Oscillator Names – Stochastics, Rate of Change, Momentum, Relative Strength Index, Williams % R, Commodity Channel Index n Miscellaneous – gives insight into intensity of bull or bear market opinion New High/Low Index, Put Call Ratio, Bullish Consensus, Commitments of Traders, Advance/Decline Index, the Trader’s Index n 15

Indicator Highlights n n Moving Averages suffer ‘whipsaw’ effect MACD Histogram works like headlights on a car – it gives traders a glimpse of the road ahead. New highs or lows in this indicator are usually followed by new high or low prices. Rate of Change shows Overbought or Oversold Momentum measures speed of traders greed or fear 16

The Neglected Essentials Volume – “Is the steam that makes the choo-choo go!” Joe Granville n Open Interest n Time Cycles n Factor of Five – awareness of other timeframes – 2 min, 10 min, 5 -6 hours per day, 5 days per wk, 4. 5 wks per month n 17

Psychological Indicators n n n n n Consensus Indicators Tracking Advisory Opinions Advertising as a Contrary Indicator Signals from Advertisers Commitment of Traders (COT) Insider Trading Odd-Lot Activity Parabolic Channel Trading Systems Standard Deviation Channels (Bollinger Bands) 18

Risk Management n n n Why Johnny cannot sell? He cannot cut losses because he hopes and hangs on…. . Most traders get killed by one of two bullets: ignorance or emotion – therefore always use a 2% loss limit! Martingale Player in a casino bets $1, as long as he wins. If he loses he doubles up and bets $2 to win back the dollar lost. 46 losses in a row he has to bet $70 Trillion on the 47 th bet……. 19

More Risk Management You can take a small loss automatically if you have the discipline to set a stop the moment you enter a trade n The goal of a successful trader is to make the best trades. Money is secondary. Concentrate on quality and good trades. Money will follow. n 20

More Risk Management Setting Stops: 1. Stop Loss Order 2. Break-Even Order 3. Protect Profit Order q Pulling the trigger is tough to do. . q After the trade, Analyze and Learn q Start using a “before and after” diary n 21

Questions 22