8 Practical Lessons From “The New Trading for a Living”

The New Trading for a Living Summary

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What’s the story of The New Trading for a Living?

Dive into the world of trading with “The New Trading for a Living” (2014), your comprehensive guide to embarking on a trading journey.

These insights provide an in-depth exploration of various trading methods designed to empower you to approach the market with minimal risk.

Who’s the author of The New Trading for a Living?

Meet Alexander Elder, M.D., a Russian-born individual who spent his formative years in Estonia.

Beginning medical school at a remarkable age of 16, he sought political asylum in the United States at 23.

Dr. Elder’s unique background as a psychiatrist in New York City equips him with distinctive insights into the psychological aspects of trading.

Today, he not only thrives as a professional trader but also serves as a dedicated trading teacher.

Among his notable works are “Come Into My Trading Room” and “Sell & Sell Short.”

Who’s The New Trading for a Living summary for?

Anyone fascinated by the dynamics of money, and investments. 

And for those wishing to learn how to maximize their power to their greatest benefit.

Why read The New Trading for a Living summary?

Embark on the journey of becoming a trader and unlock the potential to earn substantially while risking wisely.

Have you ever glimpsed at financial updates and wondered if you could join the ranks of those successful traders making money?

The financial markets are open to everyone, presenting ample opportunities for wealth creation, as demonstrated by figures like George Soros and Warren Buffett.

However, venturing into financial trading without a solid understanding is not a prudent move. Mistakes can lead to significant losses.

So, before venturing into your new life as a trader, delve into these lessons.

Crafted from the insights of a seasoned market expert, they outline the fundamental rules every novice trader should grasp.

In this summary, you’ll learn:

– The importance of maintaining a calm and calculated demeanor for successful trading.
– How making money in the market hinges on acquiring the skill of reading financial graphs.
– The significance of delving into the study of bulls and bears for a well-rounded understanding of the market dynamics.

The New Trading for a Living Lessons

Be aware of slippage and commissionsResearch and choose brokers carefully to minimize commission costs. Use limit orders to avoid slippage and control the price at which you buy or sell.
Don’t gambleAvoid impulsive trading and emotional decision-making. Take breaks if you feel the urge to trade uncontrollably. Remember, trading is a method to make money, not a source of entertainment.
Don’t follow the crowdIdentify and resist impulsive decision-making influenced by market trends. Learn from historical examples like Tulip Mania and focus on independent thinking.
Learn basic bar chart analysisUnderstand the elements of a bar chart, including opening and closing prices, highs and lows, and the distances between them. Utilize this knowledge to discern market trends and make informed trading decisions.
Understand support and resistanceIdentify support and resistance levels using chart analysis. Utilize these levels to make strategic decisions, such as buying at support and selling at resistance, to enhance your trading performance.
Monitor liquidity and volatilityPrioritize stocks with high liquidity (average daily volume) and consider volatility (beta) when choosing what to trade. Be mindful of the impact of these factors on trade execution and potential profits or losses.
Manage your riskImplement the 2% rule: Never risk more than 2% of your trading equity on a single trade. Additionally, follow the 6% rule to avoid new trades if total losses plus the risk in open trades reach 6% of your trading capital in a month.
Keep a trading journalMaintain a trade journal to record and review your trades. Use the journal to analyze your decision-making, identify patterns, and prevent emotional trading. Regularly assess your equity curve to gauge your long-term performance and refine your trading system.

1️⃣ Be aware of slippage and commissions

Ever looked at the success of renowned stock traders like Warren Buffett and wished to follow in their footsteps?

Achieving such financial prowess is indeed challenging, but awareness of early pitfalls can significantly ease the journey.

As you venture into the world of trading, the initial red flag is the peril of commissions. Every trade you execute incurs a commission paid to your broker or bank.

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If not monitored closely, these commissions can devour your trading capital. Consider this scenario: as an active trader, engaging in two trades daily, four days a week, with a $10 commission per trade.

Weekly, these commissions total $80. Over 50 trading weeks, you’d end up paying $4,000 in commissions – a whopping 20% of a $20,000 annual trading budget.

To mitigate commission costs, diligently research and compare services and commissions offered by various brokers and banks. This ensures you avoid paying more than necessary.

Another common pitfall is slippage, where your order may be filled at a higher cost than anticipated. To steer clear of this, it’s crucial to place orders thoughtfully.

Two primary order types exist: limit orders and market orders.

A market order is akin to saying, “give me a stock,” guaranteeing the stock but leaving the price uncertain. If the price rises from $50 to $53, you end up paying $3 more than intended.

In contrast, a limit order specifies a maximum price, like saying, “give me that stock for $50.”

While this ensures you won’t overpay, it also means you may not get the stock if nobody is selling at that price. Opting for limit orders is prudent, preventing unnecessary expenditure on stocks.

Paying excessive fees to brokers or overspending on stocks is just one pitfall for new traders to navigate, but there are others to be mindful of.


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2️⃣ Don’t gamble

While many perceive trading and gambling as risky money-making ventures, the reality is quite different.

Although poor trading may resemble gambling, effective trading operates on a distinct set of principles.

Trading akin to gambling often leads to rapid capital depletion, primarily because gamblers lack careful control over their financial commitments.

Identifying whether you’re trading like a gambler is crucial.

The inability to resist the urge to bet is a clear sign of a compulsive gambler. If you feel an incessant need to trade or find it challenging to stop, you are veering into gambling territory.

A practical approach is taking a one-month break to regain control over impulsive risk-taking tendencies.

Emotional reactions to single trades are another indicator.

If positive stock movements bring happiness and power, while negative shifts make you feel miserable, emotional trading has set in, leading to financial decisions based on seeking positive feelings.

A seasoned trader maintains emotional detachment, recognizing trading as a means to make money rather than forming personal connections with specific stocks.

Self-sabotage is a common pitfall, exemplified by the author’s friend, a pharmacist, broker, and trader.

His lack of caution led him to leave a substantial position unprotected during a trip to Asia, resulting in significant losses upon his return.

Preventing such devastating mistakes involves taking responsibility for your actions and their consequences.

Successful trading requires accountability for decision-making, a critical aspect to explore further in the upcoming lesson.

Moving on.

3️⃣ Don’t follow the crowd

While the term “market” may be perceived differently by amateurs, scientists, and professional traders, the latter group recognizes it as a collective of individuals following trends rather than an independent entity.

Achieving success in trading requires steering clear of the market crowd, although human instincts often push individuals to seek safety in numbers.

This primal inclination, rooted in survival instincts, can lead to impulsive decision-making, drawing people into disastrous trades.

A historical illustration of such behavior is the Tulip Mania in 1634 in Holland.

As tulip prices surged, many individuals abandoned their businesses to join the tulip trade, anticipating the upward trend to continue.

However, the bubble burst, leaving people financially ruined.

To resist the allure of the crowd, it’s essential to identify prevalent group behaviors in the market.

Categorizing the market into two groups – bulls (betting on rising prices) and bears (betting on falling prices) – provides a foundational understanding.

Analyzing crowd behavior is crucial to determine whether the market is in a bull or bear phase.

Tools like chart analysis offer effective ways to scrutinize crowd behavior, helping traders make informed decisions rather than succumbing to the blind optimism or pessimism that characterizes herd mentality.

Explore more about chart analysis in the following lesson.


4️⃣ Learn basic bar chart analysis

Understanding the construction of a bar chart is crucial for deciphering price patterns and making informed trading decisions.

A bar chart encompasses five key elements: opening prices, closing prices, highs, lows, and the distances between highs and lows.

Opening prices often reveal the amateurs’ perspective as they predominantly act in the morning before going to work. In contrast, closing prices reflect the decisions of professional traders.

A higher closing price compared to the opening price indicates bullish sentiment among professionals, while the opposite suggests bearishness.

The high of each bar represents the maximum power of bulls, while the low signifies the maximum power of bears. This information plays a vital role in determining optimal buying and selling points.

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Additionally, the distances between highs and lows reflect the intensity of the conflict between bulls and bears. Monitoring this distance is essential for estimating market activity.

An average-sized distance indicates a calm market, while half the average size suggests a subdued market. On the other hand, a bar double the average size signals an overheated market.

Traders should exercise caution when entering markets with significant price discrepancies, as this indicates potential overheating.


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5️⃣ Understand support and resistance

In chart analysis, recognizing support and resistance levels provides valuable insights into market dynamics.

Support is observed when strong buying reverses or interrupts a downward price trend.

It can be visualized as the floor that rebounds a basketball – each time the price hits this level, it tends to bounce back up.

To identify a support level on a chart, connect two or more lows with a horizontal line.

Traders remember these low levels, and when prices approach them again, there is often increased buying activity.

On the other hand, resistance occurs when robust selling reverses or interrupts an uptrend, akin to a ball hitting the ceiling and dropping down.

Resistance levels can be identified by connecting two or more highs with a horizontal line on a chart. Traders often sell at resistance levels before prices decline.

For example, the Dow Jones Industrial Average experienced a significant resistance level from 1966 to 1982 in the area between 950 and 1050, earning it the nickname “a graveyard in the sky” due to its strength.

In practical terms, traders tend to buy at support levels when prices are at their lowest and sell at resistance levels before prices decrease.

This common practice contributes to reinforcing these support and resistance zones over time.


6️⃣ Monitor liquidity and volatility

In the world of trading, various options exist, such as stocks, options, ETFs, and futures.

While stocks are commonly chosen, especially by beginners due to their simplicity, it is crucial not to become complacent when trading them.

Whether you trade stocks, options, or other financial instruments, two essential criteria should guide your choices: liquidity and volatility.

Liquidity refers to the average daily volume of traded shares. The higher the liquidity, the smoother and more efficient your trades can be.

For instance, the author learned the importance of liquidity when faced with 6,000 shares of a stock with a daily trading volume of only 9,000 shares.

Selling such illiquid stocks required multiple trades, incurring additional commissions and slippage. To avoid such situations, focus on stocks with a daily trading volume exceeding a million shares.

Volatility, on the other hand, measures the average short-term movement in a stock’s price. Higher volatility presents more opportunities for profit but also increases the risk of losses.

Beta, a measure of volatility, compares a stock’s volatility to a benchmark, often a market index.

For beginners, concentrating on stocks with low betas is advisable, as it limits potential losses during trading.

The choice of what to trade ultimately depends on your preferences and skills, but it is crucial always to consider liquidity and volatility in your decision-making process.


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7️⃣ Manage your risk

In the unpredictable world of trading, even substantial profits can vanish rapidly without proper risk management.

To secure your capital and foster sustainable trading success, it is crucial to adhere to two fundamental rules.

The first rule is the 2% rule. According to this principle, you should not risk more than 2% of your trading equity on a single trade. To apply this rule, consider the following example:

Suppose your trading capital is $50,000. Applying the 2% rule means you should limit your risk to $1,000 per trade (50,000 x 0.02).

If you intend to purchase a stock priced at $50 and set a stop order at $48 to mitigate potential losses, your risk per share is $2.

With a maximum allowable risk of $1,000, you can purchase a maximum of 500 shares. The 2% rule stands out as a highly effective strategy for minimizing potential losses.

The second rule to incorporate into your risk management strategy is the 6% rule.

According to this rule, refrain from opening new trades for the remainder of the month if the sum of your total losses for the month and the risk in open trades reaches 6% of your trading capital.

Let’s break down the application of the 6% rule:

Calculate the total losses for the current month and add the risk associated with open trades.

In the previous example, the risk was $1,000 (2% of $50,000 for 500 shares with a potential risk of $2 per share).

Summing these figures, if the total equals 6% of your capital, exercise caution and avoid initiating new trades until the month concludes.

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Adhering to these two rules can significantly enhance your risk management practices.


8️⃣ Keep a trading journal

In the realm of trading, the saying “you can only improve what you can measure” holds true. However, in trading, it’s not just about measurement but meticulous record-keeping.

Successful trading requires discipline, and maintaining a comprehensive record is akin to managing your weight – if you don’t track it, how can you achieve the desired results?

A trade journal serves as a powerful tool for systematic record-keeping. Reviewing your trades a month or two after their conclusion provides valuable insights for future decision-making.

Signals that may have seemed ambiguous initially often become clearer upon retrospective analysis.

Moreover, a trade journal acts as a safeguard against emotional trading.

By quantifying the costs of emotional decisions, you gain a firsthand understanding of the impact on your overall trading performance.

Numerous pre-existing templates are available online, making it easier to find a format that suits your preferences.

One crucial element to focus on in your journal is the personal equity curve.

This curve provides a visual representation of your long-term financial performance, indicating whether you are consistently making profits or incurring losses.

If your equity curve exhibits a downtrend, it serves as a signal to scrutinize your trading system and discipline, identifying areas that may require refinement.

Regularly updating your trade journal ensures continuous improvement and adherence to a disciplined trading approach.

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In summary, success in trading requires a combination of knowledge, focus, and discipline.

Understanding the psychological traps that individuals and crowds can fall into, along with confidence in classical chart analysis, is crucial for navigating the market successfully.

As actionable advice, consider testing the waters by opening a virtual portfolio before diving into live trading.

Additionally, expanding your knowledge through background reading will provide a valuable foundation for your trading career and benefit other aspects of your financial life.

Remember, preparation and continuous learning are key to becoming a successful trader.

The New Trading for a Living Quotes

Dr. Alexander Elder Quotes
“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.”
“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.”
“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.”
“It is hard enough to know what the market is going to do; if you don’t know what you are going to do, the game is lost.”
“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.”
“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.”
“Use limit orders almost exclusively—except when placing stops. Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.”
“The public wants gurus, and new gurus will come. As an intelligent trader, you must realize that in the long run, no guru is going to make you rich. You have to work on that yourself.”
“People deceive and play games with themselves. Lying to others is bad, but lying to yourself is hopeless.”
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