Trading For A Living Summary: Dr. Alexander Elder

Trading For A Living Summary

Trading For A Living Summary provides a free book summary, key takeaways, insightful review, best quotes, and author biography of Dr. Alexander Elder’s book.

Dr. Alexander Elder wrote the classic book “Trading For A Living” in 1993. This book is about investment psychology. It was updated and expanded in 2014 to aid new traders to become pro quickly. Dr. Elder is teaching traders for years now. His own experiences come from his medical education.

“The New Trading For A Living” provides a calmer approach to stock trading. It equips you with the necessary tools of risk-minimization and chart analysis. The book shows you which small mistakes to avoid when starting as a stock-trader.

That’s true. Elder was born in Russia. From there he moved to Estonia and began medical school at 16. When he was 23, he already worked as a ship’s doctor. He jumped one of these ships while in Africa to seek political asylum in the USA. Elder then started working as a psychiatrist in New York and then went on to teach at Columbia University. This enabled him to base his trading philosophy more on human psychology.

Hence, this book is a global bestseller. Plus, it’s pages have some amazing hands-on trading tips.

“When a beginner wins he feels brilliant and invincible Then he takes wild risk and loses everything.” 

Top Three Tips from Trading For A Living

  1. Don’t allow commissions to eat your profits.
  2. Keep emotions at home.
  3. Reduce the risk with two easy rules.

Trading For A Living Summary

Lesson 1: Don’t Allow Commissions to Eat Your Profits

It’s not possible to become a good trader overnight. You certainly can’t skip getting the experience needed to earn income out of it. But, what you may skip are some amateur mistakes.

For example, the commission. All brokers will take a commission for every single trade of yours. The fee for a single trade isn’t cheap. It comes to nearly $10 per trade. But, if it’s your start, then you may not have too much to invest. So, if you’re trading too much, commissions will eat all your profits.

Let’s suppose; you invest $10,000 over a year. You do four trades per week, which is not too much. At $10 per trade, $40 per week is going toward commissions! If you maintain this for 50 weeks of the year, you end up paying $2,000 in commission. This is 20% of your total trading sum.

Hence, it’s crucial to choose a broker who charges very less fee in the start. This will keep the trading to a minimum.

Lesson 2: Keep Emotions at Home

Another amateur mistake is to trade emotionally. Just like a game of poker, emotions don’t exist in trading too. You shouldn’t be personally attached to any single stock. Plus, you can’t buy a stock just because you like its company’s products.

If you add emotions to trading, it’ll be the start of a gamble. Do you find yourself incapable of holding back the urge to trade? Or you feel like “this one stock will take off” and allow your trade to influence you emotionally? This is when you start trading like a gambler.

But, trading is only a means of making money. And like you don’t obsess over your rent, paycheck, etc. you can’t do it with trading too.

Once you allow your emotions to rule your trade, you can see your money become zero. So, keep emotions at bay and trade with a cool mind.

Lesson 3: Reduce the Risk with Two Easy Rules

Elder outlines two simple rules so that you don’t gamble and reduce the risk of losses. They’re the 2% rule and 6% rule.

The former rule says you shouldn’t risk over 2% of your total trading capital on one trade. For example, you have a total trading capital of $100,000. In this case, buy a stock for $50, and create a stop loss at $48. This means that the stock gets sold automatically if it goes down to $48. Hence, you can purchase 1000 shares. The maximum you’ll lose per share is $2. That would be $2,000, i.e., 2% of your total capital.

But, if you don’t create a stop loss, you can buy only 40 shares. This is because 40 x $50 = $2,000. And not having a stop loss can mean you may lose it all.

The second rule also compliments the first rule. It states that your overall loss + open risk can’t exceed 6% of your trading capital in any month. If it exceeds, then you shouldn’t make new trades.

Let’s suppose you took a loss of $2,000 as explained above, this month. Now you’ve four more trades open. Each of these trades has a potential loss of $1,000. This amounts to $6,000. Hence, it means you mustn’t take new trades until the next month. This’s to ensure you don’t lose over 6% of the total capital if the four trades also go sour.

Quite an easy right? Imposing such random limits will make you safe and take away your worries. Why? Because you know you’re not taking too much risk.

Suggested Reading: One Up On Wall Street Summary: Peter Lynch

Suggested Reading: The Intelligent Investor Summary: Benjamin Graham

Trading For A Living Take-Aways

Elder gives many specific tips and rules. All of it makes this summary look like we can instantly apply to the trading room.

We like the fact that despite being specific, his tips are generic. Hence, they help you in general with trading and not restricted to a particular type of investment.

“Markets are actually set up so that most traders must lose money” 

Come Into My Trading Room: Dr. Alexander Elder

This is the follow-up book of Trading For A Living. “Come Into My Trading Room” is popular among new traders. It’s crucial to note that the author’s a practicing psychiatrist and professional trader. Yes, he does focus on the psychology part of trading. Plus, he stresses the mental reasons why traders either are habitual losers or winners. This book includes much of the same subject as the previous one. But, Elder’s trading strategy has some modifications. Plus, he expands his scope of the psychology of trading in this book. It’s a must-read.

Mind Method and Money

Like many other books on the subject, Elder covers trading in both stocks and futures. In practical life, trading is trading. Regardless of what you choose to trade, much of the same rules apply. You only ought to get a better understanding of the different traits of every market.

The book’s title sums up what it’s all about. Elder’s an expert trader, and he describes the trading strategies he uses. Plus, he explains the money management rules which are crucial to success in trading. Many read trading books only for a revelation of the most significant and latest trading systems. But, we feel that Elder’s version of the mental elements of trading could be the most substantial part of the book.

Psychology of Trading

As per the author, most traders fail due to their lack of knowledge about simple trading rules. Many people are in it due to excitement. And this is a recipe for disaster.

They’re either under-capitalized or overtrade. Such traders don’t realize the risks involved.

Elder has analyzed both professional and amateur traders. Hence, we believe he holds a decent idea of what makes traders successful. Elder offers a useful summary of the traits of both losing and winning traders. He also links them with real-world examples.

The author even discusses the change from a rookie to a professional trader. But, most are unlikely to get to that level — the reasons as to why are discussed all through the book.

We like seeing authors who trade for a living and are ticking at it. Many authors write about trading futures and stocks, when, in reality, they lack real-life experience in it. The more one trades, the more they recognize the significance of the mental part of the training. Elder is regarded as an expert in this area. Hence, his advice in the book may help many aspirational and rookie traders.

New Trading Techniques

Before we began reading the book, we were curious if Elder would name a new trading system. He couldn’t explain the same systems he did in the previous book. Well, yes, he did. We’ve to say that initially, we were a bit disappointed. But by the end of the book, we were more satisfied. We’re always on the lookout for new methods, systems, insights, and strategies on trading. Especially in futures and stocks. But, Elder, gives enough reasons on why he sticks to the same system.

Elder built his trading system several years ago. He still trades on the same system – Triple Screen.

In this book, he explains his system and some changes he made to make it better. We like that he built a system and sticks to it while modifying it in the process. Even better, he says this’s what he trades on, and he’s not hiding anything about his methods.

Some people may be disappointed with the book as they were expecting the latest system. But, I’m sure many of those aren’t successful in trading. They continuously jump from one system to the other, seeking the Holy Grail. Trading is more about consistency. Why would you stop using something which works? The truth may be that some individuals can’t get any system working. After reading the first book, we used a version of Elder’s Triple Screen trading system. And it worked very well for us!

Triple Screen Trading System

This method uses a long-term trend following system plus a short-term oversold/overbought indicator. The indicator is to help time the trades. You’ll maintain a weekly chart to set the pattern of the trend. You must take your trades in this direction only. Next, you maintain a daily chart. In this chart, you’ll use an oscillator which will tell you the oversold/overbought readings. Then, you may use an hourly chart to sell or buy on breakouts in the direction of your trend.

The good thing about this system is that you may use any timeframe which suits your style of trading. Elder advises to spread out the time horizon by a factor of five.

The theory on the entire system is trading in the direction of the trend and waiting for pullbacks within it. Then, you again enter the trade when the trend starts over. Elder also recommends using channels and moving averages to get ideal entry and exit points. You still need to work around this system to manage the trades.

No legit trading book is complete without a discussion of risk and managing trades. We feel Elder put more focus on risk in the second book. His 2% and 6% rules are simple, yet reliable money management tricks. Record-keeping of the trades is also stressed a lot, and we can’t agree more. You may learn a lot from the history of your trades. Many people fail to keep records due to laziness or their egos.

Review Regularly

Whether you read Elder’s first book or not, but his second one is an educational book for all. Be it, stock, futures, or commodities traders, this book will help everyone. It merely takes you through the steps needed to become a professional trader. Elder even presents you a sound system to review and use in your trading. Plus, don’t neglect the importance of trading’s mental aspect. It applies to both rookies and struggling traders. This’s a book to review regularly to maintain your trading on track.

Suggested Reading: The Warren Buffett Way Summary: Robert G. Hagstrom

Suggested Reading: Unshakeable Summary: Tony Robbins

Can You Day Trade For A Living?

Modern technology is giving would-be traders access to a broad range of financial markets. Hence, now there’s the possibility of a person being both a full-time worker and a part-time day-trader. Resultantly, many see day-trading as an excellent way to supplement their income source. Plus, there’s no need to do a second job.

Usually, some success in the market encourages one to question: “is it possible to day-trade for a living?”

Making the shift: from Part-Time Trader to Market Professional

Taking the plunge to become a full-time trader from a part-timer is rewarding but dangerous. As a profession, day-trading is an entirely separate task from trading out of a hobby. For a person to sustain in the highly-competitive environment, one should have the discipline, talent, and passion for financial markets.

So, don’t rush to type your resignation mail. First, develop a complete understanding of what entails the life of a day-trader.

Job Security: Compared to regular employment, a dray-trader makes money periodically. Profits depend on winning trades. These are the outcome of positive market conditions. The term “guaranteed paycheck” doesn’t exist here. Big financial rewards are likely, but the capital loss is also an inevitable part of it. In simple words, when losses are enormous, there’s no job any longer.

Mentally and Physically Demanding: The mental and physical demands of day-trading to pay your bills are enormous. Psychological stress is a large part of this profession. And this may negatively impact a person’s well-being. The market could be a pressing environment. Here significant amounts change hands every minute. As a day-trader, the emotional turmoil of being ahead a minute and behind the next may impact your overall wellness.

Solitary Pursuit: Day trading demands a person to take several decisions in each session. Questions about when to exit, enter, let profits run or cut losses need personal attention. A successful trade may give satisfaction and confidence. But a losing trade can be equally disheartening and discouraging. Eventually, failure or success falls on the trader.

“Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry.” 

Day Trading for a Living: Necessities

Day-trading could be an excellent alternative to traditional employment for many reasons. Financial freedom, professional independence, plus the ability to lead your life on your terms are some perks. These may entice many people to do the trading for a living.

But, the presence of some items is non-negotiable when joining professional day-trading. It’s advised that an aspirant trader carries his/her due diligence to secure the best elements for the job.

Equipment: New technology opens up the market to the masses. In terms of needed equipment, you need an internet connection and computer to join the market.

Market Access: To actively trade a market, choosing a brokerage service which can effectively enable transactions is a must. Brokerage firms are in all sizes and shapes from full-service to discount. Find one which is suitably priced and best positioned to trade your asset group. And then do extensive scrutiny on it.

Risk Capital: This is the money which is kept aside just for trading operations. In day-trading, risk capital acts as the inventory. In the absence of it, you can’t conduct business. Hence, enough risk capital must be there for trading functions. To make a living from day-trading, risk capital should be big enough to survive drawdown. Plus, it should support positions huge enough to generate decent returns.

Suggested Reading: The Snowball Summary: Alice Schroeder

Suggested Reading: Security Analysis Summary: Benjamin Graham

Putting It All Together: Day Trading for a Living

Anyone is having the right equipment, brokerage support, and capital can enter the market. Longevity is not a sure shot. Statistics reveal that 90% of all new traders are unsuccessful. They then leave the market. There’s no doubt that active trading is a highly-competitive undertaking with a huge turnover.

While success in the market could be intangible, there’re steps to reduce the prospects of becoming a casualty:

Trading Plan: Developing and adopting a comprehensive plan is a critical part of trading. A sound plan has tenets that govern market entry/exit and money management. Such an idea brings risk and opportunity into alignment. Hence, it increases the chances of success.

Performance Assessments: Periodic assessments of both equipment and trader performance helps identify improvement areas. A small problem can damage trader performance and lessen the efficiency of the trading plan. This negatively impacts profitability. So, early diagnosis of performance issues can help keep trading operations on time.

Education: The markets change quickly because they’re dynamic systems. Traders should stay “on the lead lap” to evolve with the market rather than being left behind. A trader is advised to be aware of the latest technology and new strategies.

With a sound trading plan, constant education, and periodic evaluation, a person can become a successful day-trader.

So What?

Day-trading could be a worthwhile profession. It provides immense satisfaction and financial independence. With the proper system, psychology, and inputs, it’s possible to be successful in the market.

But, always be cautious. The short-term trading of a security or market as the only source of income is a consuming undertaking. It may not be suitable for all. The tension of not having a steady income could be overwhelming. And so can sustained capital losses for a long time.

Suggested Reading: A Random Walk Down Wall Street Summary: Burton G. Malkiel

Suggested Reading: How to Pick Stocks Like Warren Buffett Summary: Timothy Vick

5 Things Needed to Swing Trade for a Living

Our focus is mainly on day-trading. But, we also want to discuss swing trading because some readers can’t day-trade because of many constraints.

So, we discuss the subject of what is needed to swing a trade for a living because it can be an alternate source of income for many of our readers.

Learn Day-Trading the Correct Way: Learn to trade bitcoin, stocks, and futures risk-free.

Swing trading is different from day-trading. Under swing trade, you can track if you’ve lost or won on a given day.

We cover five things needed to swing trade successfully for a living, in this article. This will help you beat the challenges of being unable to track your trading performance.

Money

We’ll start with money – the most obvious thing needed for a swing trade. Under day-trading, you can leverage four times your cash. But, under swing trading, you need to hold positions overnight. Hence you can’t take the plunge. At best, you can hold double the size of cash account through margin. But, we won’t recommend taking such a level of risk because you’re trading for a living.

To better understand the needed funds to swing a trade for a living, let’s suppose our trader is single. Plus, he has no kids.

We love our children, but the real challenges of life start once you have the responsibility of other people. You need to start thinking of their food, clothing, education, etc. The costs multiply without even trying.

When you’re single and have no kids, you need not worry about such things. Your only problem is to take care of yourself. Hence, you’ve more room to compromise on living standards.

For such case, let’s suppose you’ve total $3,500 for living expenses per month. This adds to $42,000 over a year. As we’re heavily taxed in the US, this comes to a gross trading salary of $55,000 per year. This is just to break-even.

Now that we have the number let’s get to the minimum cash we’d need in the trading account to sustain.

Let’s assume you have a starting account of $100,000. Now supposing you’ll use only cash, you’d have to make 4.2% on an average per month. This seems quite reasonable on the exterior. But, some concerns come in our mind.

Firstly, it’s quite tough to make a steady 4.2% each month. Why? Because of all the outside market factors not in your control.

Secondly, you’re not able to grow your account. Why again? Because you’ve to withdraw every penny you make in the market. So, if you have a full-time job, withdrawing all money won’t be an issue. But, swing-trading is the single source of your income.

You need a higher number to get some breathing space. For the sake of argument, to swing trade effectively, you need 100 times your monthly expenses.

Did we sweep you off your feet? There’ll be people reading this who think they can make a living out of $50,000. Well, let me ring the bell as the odds are against you.

If you’ve $350,000, you can go a whole year without making anything in trading. But, you’ll still be in the game. And this’s what it’s all about — the ability to remain in the game.

Single Breadwinner

For discussion purpose, let’s visit the other extreme. Here we have a fictitious family with a sole breadwinner. Let’s suppose the total monthly expenditure to be around $10k.

If you belong to this bracket, you’ll require 1mn dollars besides your savings to swing a trade for livelihood.

Yeah, you heard it right — a whopping 1 million dollars. Like we said earlier, you may begin with less. But, less capital means more significant stress and higher risks. It all comes down to your desired quality of life.

As you may see, the money needed increases with the increase in people in your family.

If you’re unmarried, don’t use this as an excuse to put your life on hold till you get a specific account value. Putting your life on hold for the market to come through is the last thing you must do.

All you need is to plan accordingly. To reduce the risk, you and your partner may need both works. This way, you’ll have health insurance and a second steady income. Hence, this will reduce the starting capital required on your part.

There’re many other creative ways of doing swing trade for a living. You need to think all of them through. Remember some progress is always right!

Time Box Your Trades

One of the fantastic things about day-trading is that you’re limited by the market hours. Welcome to the world of swing trade! Here things are not defined so clearly.

To better define the limits, you’ve to set a timeframe for how long you’ll be in a position. Now, there’ll be many of you who’ll say, let the winners run.

Well, no, and yes. If you’ve to pay a mortgage, you need to take money out of the marketplace. That’s the only way to do it. You can’t mail your mortgage firm an IOU request depending on your paper profits.

Another question you may want to ask yourself is how long to hold the position?

You ought to balance the time needed to complete a swing. At such point, the biggest time-frame we’d be ready to hold a position is 4-6 weeks.

The reason is that swing trade is about catching the upcoming swing. Hence the capital is always in motion and not stuck waiting for the multi-year investment. If you continue making good trading decisions, you’ll not let your money idle around for weeks.

So, what this means for the bottom line? You’ll require enough money to make sure you can pay for the expenses while you wait to close your trade because things can go beyond the one-month cycle of your expenses.

Don’t read too much between the lines. It’s not as if all your bills are going to have a balloon payment. It means that you should be ready to get some cash reserves available. Don’t tie up all your cash in the market in case you’ve to pay your bills.

Finally, timeboxing the trades will make you take cash out of the market. Hence the cash is tangible and not pixels on the screen. Taking cash out will help you realize that swing-trade is severe and not just a hobby. You’ll see the positive impacts of trading on your entire family’s quality of life.

Diversification

Get ahead of yourself through day-trading, and over-capitalize a position; then it’s still possible to manage via the trade. But, don’t focus your swing-trade position. Because you might lose a big part of your funds if things go wrong overnight.

Hence, to reduce the risk, you should diversify your holdings. The challenge in this is to lessen the risk. But, you should still be turning enough profit and limiting the number of trades.

In theory, it’s better to opt for the least number of positions, while reducing your risk. Depending on this requirement, the correct number of trades is between 3 and 4. This offers a decent position focus so that you can make enough ROI. Plus, you still have the focus and time to manage every position effectively.

Do you think, “I must hold ten positions to lessen my risk further?” Then you lack belief in your system and are not willing to do swing-trade for a living. You’re perhaps more suited for long-term investments where you can hold positions for a long time.

Let me give you a picture of what managing six-position looks like. This will help you take home this point.

Now, think that you add an extra 10 to the list. You’ll have to monitor these positions constantly both outside and during market hours.

While there’s an idea of less risk, there’re other negatives. Such negatives immensely lessen the effectiveness of the diversification.

Winning System

This one is a no brainer. Regardless of how much you plan or the money you’ve in hand, you need to win in the markets. This boils down to your trading system’s quality and your ability to make a profit.

So, what’s a winning system for you? For me, it’s just one thing. Steady profits. We don’t care much if we have more winners. If at the day’s end, I’m not making a profit, it doesn’t mean anything.

Winning Attitude

If you approach the market with little faith, you’re not going to succeed. What you reap from the market is a reflection of your attitude and relationship with money.

If you’re tight with your money, you’ll be tight with the stops. In contrast, if you’ve no value for your money, then you’ll blow it away.

When you trade from home or a small office, there’s no one to drive you through the tough phase. You’ll have to dig deep to get the courage and the hope to see past the rough times.

Conclusion

You can swing a trade for livelihood. But, depending on the needs of your lifestyle, you’ve to calculate if now’s a perfect time.

Remember, the market’s nowhere to go. So, don’t decide in a rush.

If you want to evaluate your swing trading skills, take a test drive of the Tradingsim medium. We give daily bars. This will help you simulate the swing-trading set-ups.

Trading For A Living Quotes

“When a beginner wins he feels brilliant and invincible Then he takes wild risk and loses everything.” 

“Markets are actually set up so that most traders must lose money” 

“Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry.” 

“An astute trader aims to enter the market during quiet times and take profits during wild times.” 

“So far, the only people who’ve made money from trading systems are their sellers.” 

“The answer is to draw a line between a businessman’s risk and a loss. As traders, we always take businessman’s risks, but we may never take a loss greater than this predetermined risk.” 

“To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply.” 

“People trade for many reasons—some rational and many irrational. Trading offers an opportunity to make a lot of money in a hurry. Money symbolizes freedom to many people, even though they often don’t know what to do with it.” 

“There are good trading systems out there, but they have to be monitored and adjusted using individual judgment. You have to stay on the ball—you cannot abdicate responsibility for your success to a mechanical system.” 

“To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan.” 

“Being simply “better than average” is not good enough. You have to be head and shoulders above the crowd to win a minus-sum game.” 

“Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage.” 

“The mental baggage from childhood can prevent you from succeeding in the markets. You have to identify your weaknesses and work to change. Keep a trading diary—write down your reasons for entering and exiting every trade. Look for repetitive patterns of success and failure.” 

“A loser’s true problem is not account size but overtrading and sloppy money management. He takes risks that are too big for his account size, however small or big. No matter how good his system may be, a streak of bad trades is sure to put him out of business.” 

Feedback

Having read this Trading For A Living Summary and supplementary materials, do you have anything to share with us? Please feel free to let us know your thought so that we can further discuss.

Suggested Reading: Warren Buffett and the Interpretation of Financial Statements Summary: Mary Buffett and David Clark

Suggested Reading: The Real Warren Buffett Summary: James O’Loughlin

LEAVE A REPLY

Please enter your comment!
Please enter your name here