As the saying goes, save the best for last.
And if the best was measured by sheer volume, then this substantial portion is without a doubt the highlight of the book.
It spans approximately two-thirds of the book in terms of pages, so you can expect A LOT of charts, tables and examples. This is on top of the written explanation of how these charts and indicators work. There really is much to take in.
Before you start thinking that this is what it takes to be able to trade for a living, hold up.
While it can be exciting to test the various indicators, trading systems and features of Technical Analysis…
Do ensure that you have a grasp of the earlier 2 pillars.
If you’re ready for it, here are the 5 pointers for this final pillar of the book review:
Book Review: Trading for a Living (1993) by Dr. Alexander Elder
1. <300-word Summary
7 chapters make up this second pillar on market analysis and trading systems. To break it down, they are:
- Classical Chart Analysis (charting, chart patterns, trendlines, etc.)
- Computerized Technical Analysis (moving averages, Relative Strength Index, Stochastic, etc.)
- The Neglected Essentials (volume, time, open interest, etc.)
- Stock Market Indicators
- Psychological Indicators
- New Indicators
- Trading Systems
The earlier 6 chapters in some way culminate in the chapter on trading systems. Though not entirely so, a number of the earlier-mentioned indicators and analyses are thrown into the mix.
In addition, Dr. Elder already includes sub-sections on “Crowd/Mass/Market/Trader Psychology” or “Trading Rules” with respect to the individual indicator or analysis. This is not without an accompanying chart to illustrate how it works, and what kind of action is taken at the respective points in the price chart.
As you read along, you may also start to notice patterns.
When to go long, how to identify a reversal, and start selling. Or in the opposite, when to go short, identify a reversal, and start covering.
It boils down to what the topic is about, what it means, and how you can apply it for yourself.
So while there is a lot of information to absorb, the key is to find what makes sense to you, and how application leads to results.
2. 3 Key Takeaways
i. [Support and Resistance] Memories, Pain, and Regret (pp.76-77)
“Support and resistance exist because people have memories.” (p.76)
When it comes to looking at stock charts, one of the primary things to learn is to look at the support and resistance levels. While these are not difficult to spot, it does take more skill to understand what these levels mean.
Essentially, these support and resistance levels come to be because traders have memories of these price levels.
And, along with these memories, accompanying feelings of pain and regret.
In the context of an uptrend, bulls regret not buying more, and do so at support levels. Bears, on the other hand, feel pain from shorting the market, and are looking for a chance to get out.
The reverse holds true for downtrends. Bulls feel pain and look for a chance to get out in a rally. Bears regret not shorting more, and do so at resistance levels.
Both parties are looking for second chances in the market. This comes either from the regret of a missed opportunity, or the pain of a losing position.
While this is a takeaway from the next sub-section, it is also noteworthy that the strength of the support and resistance area is dependent on 3 factors. Namely the (1) length, (2) height, and (3) volume of trading.
Suffice to say, a support and resistance zone is stronger when the:
- Length of time/number of “hits” is longer;
- Zone is taller;
- Volume is greater.
ii. [Volume-based Indicators] On-Balance Volume (pp.172-175)
Together with (1) volume, (2) open interest, (3) Herrick Payoff Index and (4) time, volume-based indicators make up the 5 “neglected essentials” in trading.
As with all indicators, it is how you make meaning of the data which provides you with an edge in the markets. For On-Balance Volume (OBV), it is one of several technical indicators which enable one to analyze volume in the markets.
Why volume matters, is that it represents the intensity of emotions of market participants.
When there is a new high in the OBV, bulls are in power, and bears are in pain. In this case, prices would likely rise. The reverse holds true – when there is a new low, bears are in power, and bulls are in pain. In this case, prices would likely fall.
Recall that prices represent the consensus of value (p.173). Volume, on the other hand, is the steam which powers the move.
Which means, that the OBV serves as a leading indicator. It often rises or falls ahead of the price action.
The psychology behind this is that a crowd is more likely to follow emotions than logic – the heart over the mind. That is the reason why volume often precedes changes in prices (p.173).
On that note, when there is a divergence in the OBV from prices, that is also the time in which the indicator gives off its strongest buy and sell signals. Like the point above on support and resistance, divergences which develop over a longer time provide stronger signals than those that only last a couple of days.
iii. Channel Trading Systems (pp.247-253)
There are 4 main ways to construct a channel:
- A channel line parallel to a trendline
- 2 lines parallel to a moving average
- Also 2 lines parallel to a moving average, except that the distance in-between depends on market volatility (Bollinger bands)
- 2 moving averages – 1 of the highs and 1 of the lows
Each type of channel has its own utility, especially in relation to one’s trading timeframe.
Nonetheless, regardless of the channel(s) in use, the psychology (meaning) is applicable to all.
The analogy here, is that the market is like a manic-depressive person (p.249). At the height of mania, he gets ready to calm down. Similarly, at the bottom of depression, his mood is ready to improve. The channel, therefore, identifies the potential limits of mass optimism and pessimism.
To bring back the bulls and bears in the picture, each animal fights harder closer to home. At the upper line of the channel is where bears are backed against the wall, fighting off the bulls. The reverse holds true at the lower channel line, where bulls are backed against the wall, fighting off the bears.
In the event that a rally fails to reach the upper channel line, it means that the bulls are losing steam. However, if the bulls break through the channel line, this is a bullish indication.
On that note, most breakouts are said to be false – exhaustion moves which are quickly aborted (p.250). Reversals typically follow as professionals trade against deviations.
It is also noteworthy that the best signals are given by a combination of channels and technical indicators which show signs of divergence.
3. How do I see myself applying what I’ve learnt
This pillar of the book is saturated with information. Rather than trying to understand and attempt all the patterns, indicators and systems…
Perhaps you can tell that I often find the psychology more interesting. (It doesn’t help that I’m not particularly sensitive with mathematical formulas.) It provides me an added lens to view the price actions. In turn, it helps me to understand what I should be doing in the markets. Plus, how I can develop my strategies to become a better trader.
As much as possible, I like to keep things simple. And if the method doesn’t work, then it calls for a review and fine-tuning.
Though here, I never quite thought about this process as a trading system.
I’ve highlighted a portion of the Channel Trading Systems because, well, I do use trendlines and indicators. So it only dawned on me recently that what I was doing was actually my own kind of trading system.
Ultimately, when there is a systematic way to enable decisions, that takes away the emotional sway of greed and fear.
Where volume-based indicators help, is to potentially identify divergence. While we often look at the price chart, volume may become overlooked and truly, a neglected essential.
As for support and resistance, what struck me was the emotions behind it. And that the longer the time/height/volume, the stronger those levels become as a result of emotional commitment.
4. TLDR; 1-liner to sum up this review
Whether it is classical chart analysis like support and resistance, neglected essentials such as volume-based indicators, or various other technical analysis and indicators, they culminate into trading systems which, with an understanding of the kinds of emotions involved, give reliable signals to enable informed trading decisions.
5. Who should read this book section
This is not the kind of book that a complete beginner at trading can pick up and comprehend. I would go as far to say that if you do not have vested interest in the markets, this might even be a pretty dry read.
However, it is excellent for those who are serious about learning how to trade better.
Especially if the goal is to trade for a living, then chapters like the neglected essentials are all the more crucial for your understanding.
At the same time, it is also suitable for anyone who is looking to improve their trading strategies. I am confident that you will be able to gain new insights. What I have shared here is merely the tip of the iceberg.
To sum up this series on Dr. Alexander Elder’s book “Trading for a Living”, I am reminded of the saying that nothing worthwhile is ever easy. Even so, we are blessed that others have already walked the path before us.
To some extent, the road has already been paved.
It is not just showing us that it is achievable. Expending herculean effort to develop a resource like this book takes untold dedication.
“Losers bring money into the markets, which is necessary for the prosperity of the trading industry.” (p.6)
While the odds are against you, surely you have ways to access resources such as this one to elevate your chances of winning.
As we always say, focus on the process, and the result will take care of itself.
“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) also 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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