The New Trading for a Living Summary and Review

by Dr. Alexander Elder
  Has The New Trading for a Living by Dr. Alexander Elder been sitting on your reading list? Pick up the key ideas in the book with this quick summary. Do you sometimes read financial newspapers, watch the financial update on the news, or surf the web and ask yourself “Wow, if all these people are making so much money, why wouldn’t I try as well?” And why not? Nowadays, the financial markets are open to everyone and there is a lot of money just waiting to be made. Just think of Warren Buffet and George Soros and the wealth that they managed to make. However, it is important to mention that jumping into financial trading without any previous experience and knowledge could be a costly mistake. As such, before you try your hand at trading, you should read this book summary. The New Trading for a Living is a book based on the experiences of a market expert and consists of a comprehensive guide to the basic rules that all trading beginners should know. From Dr. Alexander Elder’s The New Trading for a Living book summary you’ll discover:
  • That one must be calculating and unemotional in order to become a good trader;
  • That learning how to read a graph is essential to making money on the market; and
  • Every trader knows what a bull or a bear market refers to.

THE NEW TRADING FOR A LIVING CHAPTER #1: New traders often fall into all kinds of traps and they sometimes end up paying more than they had planned.

Have you ever wondered why your life is so much different than Warren Buffet’s? Well, the truth is, it doesn’t have to be. Getting there is certainly a huge challenge but if you are aware of the risks and potential pitfalls, things might become a bit easier. As you start making your way into trading, you need to become aware of how dangerous the commissions can be. You pay your bank or your broker a fee each time you do a trade and if you are not careful, these commissions might start to eat up a lot of your money. For example, if you are an active trader who does two trades every day for days a week and you pay $10 in commissions for each trade, by the end of every week you will end up paying $80. Say you’re an active trader, doing two trades a day, four days per week, paying $10 per trade in commissions. After just one year of trading, you will pay $4,000 in commissions. If you are trading $50,000 per year, you’ll probably spend more than 20% of your budget on bank and trader commissions alone. If you want to minimize the costs of these commissions you need to do thorough research on various banks and brokers. By comparing their services, you ensure that you are not paying more than necessary. Another common pitfall that beginner traders have to deal with is slippage. Slippage consists of filling the orders with less money than you pay. In order to avoid this common mistake, you need to pay close attention to how you make your orders. It is important to know that there are two different types of orders: limit orders and market orders. Using a market order guarantees you stock and is pretty much like saying, “give me a stock.” However, you don't know at which price you’ll get the stock. If the price of the stocks increases from $30 to $35 you end up paying $5 more than you had planned. By using a limit order you basically say that you’ll only pay $30 for a stock. But if nobody is selling stocks for $30, you will not get anything. If you want to avoid overpaying, you should definitely choose a limit order. Paying too much for services is not the only pitfall that beginner traders need to be aware of.

THE NEW TRADING FOR A LIVING CHAPTER #2: Good traders never gamble.

A lot of people think that the trading business is a lot like gambling. And why is that? Maybe it’s because, for people who are not familiar with the market, trading seems like a very risky way to make money. But for experienced traders, that is not the reality. While poor trading has a lot in common with gambling, good trading is nothing like it. If you do your trading as you do your gambling, your chances of losing your capital are extremely hight. Bad traders and gamblers don’t have full control over their finances. But how can you know if you are trading like a gambler or not? If you are unable to resist the temptation to place a bet, then you are an innate gambler. If you feel like you simply need to trade or if you find it difficult to stop, then that is a clear red flag. If you want to avoid gambling while trading, you should take a break, analyze your risk-taking needs and find a way to keep them under control. Another clear sign of gambling is when you are emotionally affected by single trades. If you feel powerful and happy whenever the stocks move in your favor, but if you feel bad everything the trade moves against you, then you are probably a gambler. Mixing trading with emotions is not a good sign and you need to avoid gambling away your money as a way to feel positive feelings. Professional traders know that they should never get emotional about their stocks and they look at trading objectively. They never have personal connections with their investments, with their money or with a particular stock. Another common pitfall for both beginners and experienced traders is self-sabotage. In fact, this is exactly what one of the author’s friends, who was a trader and a broker, did. As a pharmacist, broker and trader, he was unsuccessful but prone to careless decisions. Because he had a natural inclination towards making careless decisions, he went on a trip to Asia and left a vast position open with almost no security. Unsurprisingly, when he returned from his trips, all his capital was wiped out as that position had decreased. But what can you do in order to prevent making a similar mistake? The answer is simple: You need to take full responsibility for your actions and for the consequences. Taking responsibility for the decisions that you make is an essential part of good trading. Learn more about this from the next chapter!

THE NEW TRADING FOR A LIVING CHAPTER #3: Following the crowd isn’t always a good idea when it comes to the market.

In trading, we spend a lot of time discussing the market, but what does this concept actually mean? Amateur traders believe that the market is an entity in its own right, while specialists know that it’s actually a scientific body. Professional traders, however, describe the market as being the way in which masses of people follow certain trends. Avoiding the market crowd is an essential aspect of becoming a successful trader. But it is not always easy to remain an independent thinker. In fact, our human instincts can sometimes make us seek the safety of the crowd. For instance, a stone-age hunter had a lot more chances to survive and to catch something if he joined a crowd of hunters. So, even if you won’t find any literal saber-tooth tigers on Wall Street, your primitive impulses might affect your trading choices. Making decisions based on impulses can be quite dangerous and it wouldn’t be the first time someone is sucked into a bad trade because of it. Just think of Tulip Mania, a historic event that took place in 1634, in Holland. Because tulips were increasing in price, people were convinced that the pattern would continue for a long time. A lot of them even quit their jobs and abandoned their businesses just to try their hand at growing and selling tulips. Unsurprisingly, the market tulip businesses collapsed and many people were left destitute and broke. So what do we need to do in order to stay away from the crowd? First, we need to be able to identify the most common group behaviors of the market. We can divide the market into two separate groups: bulls and bears. Bulls will only bet on the prices that are going up and bears on those that are going down. When bulls are on top and feel optimistic that things are going to go well, the prices will naturally go up. On the other hand, when there is an increase in pessimistic bears, the prices will go down. To understand whether you are in a bear or in a bull market, you will need to know how to use some crowd analysis tools. An incredible way to analyze the crowds is by using Chart analysis. Learn more about this from the next chapter.

THE NEW TRADING FOR A LIVING CHAPTER #4: For a good understanding of the market, learn the basics of bar charts.

Are you familiar with concepts such as an index like the S&P 500 or a chart stock but you are not yet sure about their meaning? By using classical chart analysis, you can easily identify patterns in prices and benefit from them. But in order to gain a profit, you’ll need to know how bar charts are constructed. It is important to know that there are five main elements that you need to take into account: closing and opening prices, the highs and lows of a bar, and the distances between the bar highs and lows. As a general rule, the opening prices indicate what the amateur traders’ opinion of the value is since they are generally taking action in the morning before they go to work. The closing prices, however, indicate the opinion of value of professional traders. When the closing prices are significantly higher than the opening prices, that means that the professionals tend to be more bullish than the amateurs, and vice versa. This is precisely the type of knowledge that beginner traders need in order to be able to identify whether they are in a market of bulls or in a market of bears. The maximum power of bulls is reflected by the high of each bar, while the maximum power of bears is indicated by the low of each bar. When deciding when to buy and when to sell your shares, you need to keep a close eye on these bars. Finally, the discrepancy between the bulls and bears is indicated by the distances between the highs and lows. You will need to pay attention to this distance if you want to be able to correctly estimate the market activity. A cool market is indicated by an average-sized distance between the highs and lows. If the distance is half the average size, you might be dealing with a sleepy market and if the bar doubles in average size, then you are dealing with an overheated market. In quiet markets, slippage is generally lower, so you should avoid trading when you notice huge price discrepancies or other red flags that might indicate an overheated market.

THE NEW TRADING FOR A LIVING CHAPTER #5: To analyze the charts effectively, a trader needs to have a good understanding of resistance and support.

You now know what the bar chart can tell you about the market and you are able to read it correctly. However, there are two other elements revealed by the bar chart that you are not yet familiar with. These elements will help you to grasp the mood of a market better and to make safer predictions. We will need to examine the price level in order to find the first of the aforementioned elements. When a downward price trend is interrupted or reversed by a very strong buying wave, we are dealing with support. You can think of support as the floor that you bounce a tennis ball on. The tennis ball bounces back up every time it hits the floor. By connecting two or more rows with a horizontal line in a chart, you can find the support level. What makes the support level exist is the fact that traders have memories. If the prices of certain stocks were falling and stopped at a certain level and then increased again, a lot of traders would remember this pattern and will become more likely to invest when they detect it again. When an uptrend is reversed or interrupted by selling, we say that the market is currently demonstrating resistance. To have a better understanding of what resistance means in trading, you can think of a ball that you are tossing up. When the ball hits the ceiling, it drops down. The ceiling, in this example, is the resistance level. By connecting two or more highs with a horizontal line in a chart and by using chart analysis you can easily find the current market’s levels of resistance. A major US Index, The Dow Jones Industrial Average, saw a major resistance level between 1966 to 1982. Whenever there was an uptrend between Dow Jones Industrial Average’s 950 and 1050 areas, the uptrend stopped and it was reversed. This resistance zone was so strong that it became known to traders as “a graveyard in the sky”. It is generally recommended to begin selling before the prices go down when you hit the resistance level, and buy when the prices are in their lowest, at the support level. In fact, it is very common for traders to sell at resistance levels and buy at support levels, which makes these levels even further entrenched.

THE NEW TRADING FOR A LIVING CHAPTER #6: Regardless of what vehicle you trade, you should always keep an eye on volatility and liquidity.

There are many different things that can be traded: options, stocks, futures, and ETFs, to name just a few. Each one of these groups has its advantages and disadvantages. The most common thing that we trade, however, is represented by stocks. Because they are relatively easy to understand, stocks are great for traders who are just starting out. But just because trading stocks is somewhat easier, it doesn’t mean that traders can be careless when buying and selling them. In fact, staying meticulous is crucial, especially when deciding how many stocks you should trade. During a week, the author of this book only monitors single-digit amounts of stocks. Some of his friends, however, are able to watch dozens at a time. The amount of stocks that you take on depends on your ability to manage it effectively. But regardless of what and how much you choose to trade, you should always meet the criteria of liquidity and volatility. The average daily volume of traded shares is known as liquidity. As a general rule, if the liquidity is higher, trading becomes easier. When he got stuck with 6,000 shares of a stock but was only allowed to trade 9,000 per day is when the author learned the importance of liquidity. Because he wanted to get rid of the shares, the author had to do multiple trades and to pay commissions and slippage. If you want to avoid being in this unpleasant position, you should only focus on above a million per day-rated stocks. The average short-term movement in stock prices is known as volatility. If the volatility is higher, then there are more opportunities to make but also to lose money. We can use a beta to measure volatility. Beta helps us compare a stock’s volatility to its benchmark, which is a general figure that reflects the health of the market in a similar way to the market index. For instance, when the beta has a value of two, stocks will most likely rise to ten percent whenever the benchmark rises five percent. Beginner traders should focus on betas that are lower in order to avoid substantial loss. You should always keep liquidity and volatility in mind while trading based on your skills and preferences.

THE NEW TRADING FOR A LIVING CHAPTER #7: To minimize your risk, there are two simple rules that you can use.

No matter how much profit you make from trading, your capital could vanish within minutes without proper risk management. In order to be safe, you need to follow two simple rules. The first rule is known as the 2% rule. This prevents you from risking on a single trade more than 2 percent of your trading equity. If you want to implement this rule, there are several factors that you need to consider. Here is an example to illustrate this: Imagine that the trading capital that you currently have in your account is $50,000. By following the 2% rule, you are only allowed to risk $1,000 (=50,000 X 0.02) per trade. Now, if you wish to buy a stock worth $30, you need to set a so-called stop order to limit your risk of losses. Whenever the stock prices fall to a given amount, the stop order will automatically sell. In the aforementioned situation, you only risk $2 per share. If you were allowed to risk $2,000, you could buy a maximum of $1,000. The 2% rule is considered by many experts one of the most effective ways that traders can use to minimize their losses. Another rule that beginner traders can implement is the 6% rule. This rule prevents traders from opening new trades whenever their monthly losses plus risk reach 6% of their trading capital. Here is an example of how the 6% rule works. First, we need to calculate our monthly losses and add our current risks in open trades. By using the previous example, this risk is $2,000, or 2 percent (1000 shares with a risk potential of $2 each). Finally, we add these numbers and if their sum equals 6 percent of our trading capital, we need to abstain from making any more trades during the current month.

THE NEW TRADING FOR A LIVING CHAPTER #8: A trade journal can help you keep your trading on track.

Are you familiar with the saying “you can only improve what you can measure”? The same applies to trade, except we should be doing more than just measure. The basic principle behind successful trading consists of record-keeping, which helps traders maintain and develop discipline. The importance of disciplined record-keeping in trading is comparable to weight control. If you don’t know how much weight you have and how much you are gaining or losing, it is impossible to get the results you want. This also applies to trade. If you are not aware of how much you have, how much you are gaining and how much you are losing, improving your future strategies becomes impossible. Keeping a trade journal is a very effective way to keep records of your trades. You will be better prepared for future sales if you review your previous trades for one or two months in advance. More often than not, certain trading signals that are confusing and vague at first, become clear when you review them for more than one month. By keeping a journal you can also avoid emotional trading, as you can notice whether you are losing money with feel-good trading costs. And what’s even better, there are many pre-made templates available online and finding one that suits your needs shouldn’t be too difficult. One aspect that you should keep an eye on throughout your journal entries is your personal equity curve. The personal equity curve will reveal if your trading system is efficient and will help you understand whether you’re making money or losing money in the long-term. If you notice a downtrend in your equity curve, you might need to be more careful with your system and find the issue that needs to be fixed.


What is the key message of Dr. Alexander Elder’s The New Trading for a Living: Focus, knowledge, and discipline determine a trader’s success on the market. If you have a good understanding of the pitfalls of individual and crowd trading psychology and you are comfortable with classical chart analysis, then you are on your way to becoming a professional trader. Valuable advice: You should always test the waters before you decide to take the plunge! If trading is something that excites you, why not start by opening up a virtual portfolio where you can test your skills. If you think you have a natural inclination towards finances, then the first thing that you need to do is broaden your knowledge and understanding of it. As you embark on your career in trading, you will find this background reading extremely helpful. What to read next? Guy Spier’s The Education of a Value Investor In his bestselling book, The Education of a Value Investor, Guy Spier discusses his incredible transformation from Wall-Street greedy hedge-fund manager to a successful value investor. In his book, Spier shares his life story and the knowledge that he acquired along the way. He lets us in on a lot of secrets to reach financial success and to lead an ethical life. Furthermore, Spier also names some of the people who had a great impact on his career and explains how each of them had a unique world view.