The more that you read, the more things you will know. The more that you learn, the more places you’ll go.
– Dr. Seuss
Originally, the plan was to post 1 article per book review.
But as you may notice, this book review on trading for a living is going to be split into a few parts. This is to not do a disservice to you (and also to the well-meaning author).
There is much to be learnt. To narrowly present my vast takeaways from this book would be such a shame. So, here goes this first part, in digestible yet selective fashion:
Book Review: Trading for a Living (1993) by Dr. Alexander Elder
1. <300-word Summary
Trading psychology makes one of three pillars in a successful trader. This can be broadly divided in two categories – individual and mass psychology.
When it comes to individual psychology, there are several myths one may believe when met with setbacks in trading. Examples include the brain myth, undercapitalization myth, and autopilot myth. One may even buy into various market gurus with the expectation of acquiring a “parent-like omniscient provider” (p.23). Identifying self-sabotaging behaviours and learning from past trades via a trade journal is therefore key to succeeding.
On mass psychology, it is crucial to first understand what price is: A momentary consensus of value between buyers, sellers, and undecided traders at the moment of transaction (p.46). Next is the market, which is a crowd of people where members attempt to take money away from one another by outsmarting them (p.48). While it is important to respect the strength of the crowd by not bucking a trend, successful traders are independent thinkers. They follow objective trading systems and money management rules. They also manage information instead of attempting to forecast, either by means of fundamental or technical analysis.
2. 3 Key Takeaways
i. Losers Anonymous (pp.33-38)
“Good morning, my name is _, and I am a loser. I have it in me to do serious financial damage to my account.” (p.37)
This is my favourite takeaway from this section. The concept was inspired from “Alcoholics Anonymous”, a self-help group which helps alcoholics recover from their addictions. The key is that these individuals, after joining the group, are able to stay sober and not relapse into drinking again.
There are several parallels when assessing an alcoholic and a losing trader (loser for short). While I will spare you the details, the idea is to stay serene and sober. Look for the best and safest trades, and do not take on a greater loss than the predetermined risk.
In the long run, the sober man emerges victorious in the race that is the markets. Being aware of how wrong a trade can go – and how not to spiral downwards – is important.
ii. The Demolition Derby (p.26)
There is no safety net. The markets do not operate with “normal human helpfulness”. It is not difficult to see why traders who do not have an understanding of the market end up losing instead of gaining profits from it.
The analogy here is that trading is like driving on a highway. Drivers (traders) try to hit one another as if it is a bumper car game, when in fact there is collateral damage to be done. Buying at the high of the day is akin to swinging open the car door despite the traffic. When that buy order reaches the trading floor, other traders charge at you to sell, ripping the car door and perhaps your arm in the process.
Suffice to say, it’s chaos.
“Normal human helpfulness” in the context of driving on the roads include avoid hitting other cars, swerving or sounding the horn if someone acts dangerously, and generally abiding by traffic rules. In the markets, however, you are up against the crowd. Everyone wants a piece of each other.
When you lose, someone else gains. If your account goes bust, that’s one less competitor in the markets.
iii. A Crystal Ball (pp.66-67)
Perhaps it helps that the weather forecast is hardly reliable (at least here in Singapore). I simply see what the weather is like, and decide how to dress and whether to bring an umbrella with me.
In terms of the stock market, it appears that amateurs ask for forecasts, whereas professionals manage information – and make decisions based on probabilities.
While I certainly am not a trading professional, the analogy raised here again makes perfect sense to me. In the field of medicine, patients are brought in, and anxious loved ones seek a “forecast” from the doctor in the form of questions like “will he be alright?”, “how long till he can get discharged?”, or even “is his life in danger?”.
The priority of the doctor, however, is to tend to the wounds and pains. Find out what happened to the patient, what is the medical history, etc. Even after administering treatment, he has to monitor the trend – is the patient responding well to medication? Are there infections? Is the patient well on the road to recovery?
The doctor manages the patient information, rather than attempting to provide quick forecasts.
In a similar vein, you do not need forecasts to succeed in the markets. In fact, being able to extract information, sticking by your trade plan, and practicing good money management will be more beneficial endeavours.
And not forgetting, of course, to hone your trading psychology.
3. How do I see myself applying what I’ve learnt
Sometimes it is easy to get caught up in the technical how-tos of trading. After all, besides serving an educational purpose, is also entertaining to learn. Just think about the “pattern more than badminton” variety of chart and candlestick patterns, indicators and the like.
Trading psychology, on the other hand, might not seem as attractive in comparison.
Perhaps it is even a “know-it-already” attitude that catches us unawares at times.
However, do we really have an understanding of our individual trading psychology? On that note, how well do we respond when it comes to mass psychology?
In terms of practical application, I could use the Losers Anonymous approach to begin my trading day. It serves as a reminder to not take risks beyond what I have planned for, and to be patient when looking for a good set-up.
It also helps to remember that in this reckless highway of trading, other drivers are eagerly waiting to crash into me. There is no safety net. I owe it to myself to be responsible for my trades and review the lessons so that I can avoid making the same type of losses.
4. TLDR; 1-liner to sum up this review
I am a loser with the potential to cause collateral damage to myself, so I carefully navigate the dangerous (trading) highway while prioritizing the management of information like a professional doctor.
5. Who should read this book section
If you are trading and you think you “know it all”, this section will provide both insight and entertainment into trading psychology.
It helps that the author adopts a no-nonsense tone in his writing, which makes reading light-hearted yet introspective at the same time. As you can tell, the various analogies make the points highly relatable as well – you can be sure to expect plenty more of such descriptions inside.
If you have not started trading, it is all the more beneficial for you to read this section. Trading psychology, while overlooked by enthusiastic retail traders, certainly cannot be belittled.
Having an understanding of both your individual trading psychology as well as mass psychology will give you an edge over fellow traders who lack understanding in this area.
You could start on the right foot and join the winning crowd that profits from the markets.
“A book is a gift you can open again and again.” – Garrison Keillor. But… So many books, so little time! Since our time on earth is finite, may this book review (series) serve as a sneak preview to help enable your decision. Will this book be the gift that you open again and again?
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