Trading For A Living - Dr Alexander Elder - An animated book review
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Who is Dr Alexander Elder?
Dr. Alexander Elder is a professional trader and the author of a number of books. He was born in Leningrad and grew up in Estonia. At the age of 16 he studied the medical profession. At 23, while working as a ship's doctor, he received political asylum in the United States. He worked as a psychiatrist in New York.
He now consults private traders and financial institutions. His company produces books on stock trading. This book “Trading for a Living" has been translated into 12 languages and has become one of the most popular books in the history of stock exchanges.
The book explores the three pillars of success—psychology, trading tactics, and money management—as well as the factor that ties them together—record-keeping, Which DR. Elder says is very important.
Elder, a trained psychiatrist, analyzes both individual trader behaviour and mass psychology—that is, the behaviour of trading masses.
Dr Elder quoted:-
“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 ”.
The key aspects of the book we aim to cover are; Classic chart analysis, technical analysis, Psychology and risk management. Those traders who have not yet developed their own successful strategies will profit from this balanced, suggestive overview.
Dr Elder suggests we must first consider risk management, Because even with the best tactics the trader will fail if he does not exercise proper risk management.
As Elder writes, “Markets can snuff out an account with a single horrible loss that effectively takes a person out of the game, like a shark bite. Markets can also kill with a series of bites, none of them lethal but combined they strip an account to the bone, like a pack of piranhas”
Dr Elder provides two rules, or what he refers to as the two pillars of risk management.
the 2% and 6% Rules
The 2% Rule will save your account from shark bites and the 6% Rule from piranhas.” The first rule prohibits the trader from risking more than 2% of his account equity on any single trade. The second prohibits the trader from opening any new trades for the rest of the month when the sum of his losses for the current month and the risks in open trades reach 6% of his account equity.
If you want to implement this rule, there are several factors that you need to consider.
Here is an example:
Imagine that the trading capital that you currently have in your account is £50,000. By following the 2% rule, you are only allowed to risk £1,000 per trade. So, if you wish to buy a stock, you need to set a stop order to limit your risk to 2% or £1000. Whenever the stock prices fall to the predetermined amount, the stop order will automatically sell.
In this chart example we assume the current stock price is £10, we also assume that the ideal stop loss price should be £9, perhaps based on a support level.
Knowing that the 2% rule will allow us a maximum risk of £1000 on this trade, we can equate that the position size to hold this stock is £10,000. Equal to 20% of the overall trading account.
The 2% rule is considered by many experts one of the most effective ways that traders can use to minimize their losses, OR stop a big bite sized loss.
The 2nd rule that Dr Elder recommends is the 6% rule. This rule prevents traders from opening new trades whenever their monthly losses reach 6% of their trading capital. We stop from making any more trades during the current month.
“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.”