The New

Trading for a
Living
Psychology • Discipline
Trading Tools and Systems
Risk Control • Trade Management

Dr. Alexander Elder

www.elder.com
www.spiketrade.com
 CONTENTS

Prefacexiii

Introduction1
╇ 1. Trading—The Last Frontier 1
╇ 2. Psychology Is the Key 3
╇ 3. The Odds against You 5

ONE Individual Psychology 9

╇ 4. Why Trade? 9
╇ 5. Reality versus Fantasy 10
╇ 6. Self-Destructiveness 16
╇ 7. Trading Psychology 19
╇ 8. Trading Lessons from AA 21
╇ 9. Losers Anonymous 23
10. Winners and Losers 27

TWO Mass Psychology 31

11. What Is Price? 32
12. What Is the Market? 33
13. The Trading Scene 36
14. The Market Crowd and You 39
15. Psychology of Trends 43
16. Managing versus Forecasting 46

THREE Classical Chart Analysis 49

17. Charting 50
18. Support and Resistance 55

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viii CONTENTS

19. Trends and Trading Ranges 60

20. Kangaroo Tails 65

FOUR Computerized Technical Analysis 69

21. Computers in Trading 69
22. Moving Averages 74
23. Moving Average Convergence-Divergence:
MACD Lines and MACD-Histogram 80
24. The Directional System 89
25. Oscillators 95
26. Stochastic 95
27. Relative Strength Index 99

FIVE Volume and Time 103

28. Volume 103
29. Volume-Based Indicators 107
30. Force Index 112
31. Open Interest 117
32. Time 121
33. Trading Timeframes 126

SIX General Market Indicators 133

34. The New High–New Low Index 133
35. Stocks above 50-Day MA 139
36. Other Stock Market Indicators 140
37. Consensus and Commitment Indicators 142

SEVEN Trading Systems 149

38. System Testing, Paper Trading, and the
Three Key Demands for Every Trade 151
39. Triple Screen Trading System 154
40. The Impulse System 162
41. Channel Trading Systems 166

EIGHT Trading Vehicles 173

42. Stocks 175
43. ETFs 176
44. Options 178
45. CFDs 186
46. Futures 187
47. Forex 194
CONTENTS ix

NINE Risk Management 197

48. Emotions and Probabilities 197
49. The Two Main Rules of Risk Control 202
50. The Two Percent Rule 203
51. The Six Percent Rule 208
52. A Comeback from a Drawdown 210

TEN Practical Details 215

53. How to Set Profit Targets: “Enough” Is the Power Word 215
54. How to Set Stops: Say No to Wishful Thinking 219
55. Is This an A-trade? 225
56. Scanning for Possible Trades 230

ELEVEN Good Record-Keeping 233

57.Your Daily Homework 234
58. Creating and Scoring Trade Plans 238
59. Trade Journal 243

A Journey without an End:

How to Continue Learning 249

Sources253
Acknowledgments257
About the Author 259
Index261
 P R E FA C E

T ╃rading for a Living was published in 1993 and became an international best seller.
It remains at the top of many reading lists, as friends recommend it to friends and
trading firms give it to their new hires. All these years, I resisted revising my book
because I trusted and liked its internal logic. I traded, traveled, wrote other books,
and taught a few classes. Now, 21 years later, I agreed to update my most popular
book so that you can benefit from the new technologies as well as the lessons I’ve
learned.
My late great friend Lou Taylor, to whom this book is dedicated, used to joke: “If
I get half a percent smarter each year, I’ll be a genius by the time I die.” Revising my
very first book felt like reliving my youth with the benefit of experience.
In planning this update, I thought of a building complex in Vienna, Austria
called the Gasometer. At its core are multistory storage tanks, erected by Austrian
bricklayers in 1927. When modern technology made huge gas cylinders obsolete,
architects converted them into modern apartments. They punched wide openings
in brick walls, creating panoramic views, installed floors and elevators, and added
glass-enclosed penthouses. I used to stay in one of them and wanted my new book to
follow that model of blending old craftsmanship with new technology.
Before you begin reading this book, ask yourself: what’s the single most important
step you can take to become a successful trader?
Psychology is important. Since I was actively practicing psychiatry while writ-
ing the original Trading for a Living, its psychology part stood the test of time and I
changed it very little in this new edition.
Market analysis is very important—but remember that when we look at a chart,
we deal with only five pieces of data—the open, the high, the low, the close and
volume. Piling up masses of indicators and patterns on top of those five values only
increases confusion. Less is often more. If you’ve read Trading for a Living, you’ll see
that I’ve reduced the number of technical chapters and moved some of them into
a downloadable addendum. On the other hand, I added several new chapters that

xi
xii PREFACE

focus on new tools, notably the Impulse system. I also added a section on stops,
profit targets and other practical details.
Money management is extremely important because financial markets are hot-
beds of risk. That was the weakest part of the original book, and I completely
rewrote it. One of many tools you’ll discover will be the Iron Triangle of risk
control.
Psychology, trading tactics, and money management are the three pillars of
success, but there is the fourth factor that ties them together. That factor—which
integrates all others—is record-keeping.
Keeping good records will enable you to learn from your experiences. It’ll help
you break out of the vicious circle of small gains and big losses, running like a squir-
rel in a barrel, sweating and stressed but never getting anywhere. Keeping good
records will make you your own teacher and a better trader. I’ll show you several
types of records you need to keep and will share several of my trade diaries.
If you’re a new reader, welcome to the journey. If you’ve already read Trading for a
Living, I hope you’ll find this new book two decades smarter than the first.
Dr. ↜Alexander Elder
NewYork–Vermont, 2014