The New Trading for a Living | Alexander Elder

Summary of: The New Trading for a Living: Psychology, Trading Tactics, Risk Management, and Record-Keeping
By: Alexander Elder

Introduction

Dive into the exciting world of stock trading with Alexander Elder’s book, ‘The New Trading for a Living: Psychology, Trading Tactics, Risk Management, and Record-Keeping’. This summary will guide you through the ins and outs of successful trading while helping you avoid common pitfalls. Learn about the importance of cutting down commission costs, understanding market trends, and managing risks effectively. Educate yourself on different trading options and pick up practical tips for identifying support and resistance levels, maximizing liquidity, and managing volatility. Finally, explore the crucial practice of maintaining a trade journal to improve your strategies and stay disciplined throughout your trading journey.

Mastering Pitfalls In Stock Trading

Join the league of successful traders like Warren Buffet by avoiding early pitfalls that could eat up your trading money. Beware of commissions and slippage – the two main culprits that can cripple your efforts in the stock market.

The book encapsulates the dangers of commissions in trading. Every trade done by the active trader requires a commission to be paid to the broker or bank. Failure to keep a watchful eye on these charges could lead to significant losses in the trader’s initial capital. Spending 20 percent of one’s trading budget on commissions alone is not a fair trading ground for fruitful investment. To avoid this pitfall, traders need to do thorough research on different brokers and banks, compare their services to get the best deal on commissions.

Slippage, another pitfall, is when the order is filled for a higher price than expected. It’s important to know the right way of placing one’s order to avoid slippage. Market orders, which are like asking for a stock, are not effective since the price is not at your discretion. A limit order is better as it guarantees that no stock is bought over your budget. It’s like asking for that stock at your price.

In conclusion, stock trading requires careful attention to detail, and as such, traders must know the different pitfalls to avoid before they begin trading. This book tells you exactly what to do to avoid losing valuable dollars in the stock market.

Trading versus Gambling

Many people mistake trading for gambling due to their shared risky nature. However, this is far from the truth. Poor trading may resemble gambling, but good trading is nothing like it. A professional trader trades to make money, avoiding emotional trading and its pitfalls. Emotional trading causes traders to lose money by gambling away in search of positive feelings. Not being able to resist the urge to bet may lead to self-sabotage. Professional traders don’t get emotional as they know trading is a purely financial pursuit. To become a successful trader, one must take responsibility for their decisions and their consequences.

Trading and Independent Thinking

The book introduces the concept of the market and the significance of independent thinking for traders. Amateurs and those from a scientific background consider the market as an entity or a scientific body, respectively, while professional traders understand it is a mass of people following trends. Independent thinking is crucial for traders to avoid the market crowd and impulsive decision-making that can lead to disastrous trades. The author explains the impact of human instinct in seeking the safety of the crowd, citing examples such as the Tulip Mania, which left people broke and destitute. The book proposes identifying group behavior in the market by categorizing it into bulls (prices will rise) and bears (prices will fall) and analyzing this behavior using chart analysis as a tool. The book offers insights into how the crowd can sway the market and the importance of staying independent to become a successful trader.

Understanding Classical Chart Analysis

If you’ve ever looked at a stock or an index chart and felt unsure about what it meant, classical chart analysis can help. The five elements of bar charts opening prices, closing prices, highs, lows, and the distance between highs and lows are crucial to understanding how to read charts and make informed buying and selling decisions. Opening prices can reflect amateur opinions and closing prices can show the decisions of professional traders. Learning to distinguish bullish and bearish markets is vital. The high and low points of each bar indicate the strength of bulls and bears, respectively. The distance between the highs and lows reflects the intensity of the market’s conflict. Deviations from the average size of this distance can mark an overheating or a sleepy market. Proper interpretation of bar charts is key to predicting market trends and avoiding unnecessary risks.

Understanding the Secrets of a Bar Chart

Through the use of a bar chart, one can understand the market mood by identifying the support and resistance levels. These two aspects help traders anticipate price fluctuations and ultimately boost their profits. Support level is the price level where buying soars to interrupt a downward trend, while resistance level is where selling surges to disrupt an upward trend. By connecting two or more lows on the chart with a horizontal line, one can spot a support level. The same applies to a resistance level where two or more highs are connected with a horizontal line. Dow Jones Industrial Average serves as an excellent illustration of what resistance zones are like, representing the “graveyard in the sky.” Therefore, traders are advised to sell stock when they hit the resistance level, and purchase at the support level. Doing so, reinforces these essential price levels.

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