Tuesday, April 3, 2012

TRADING FOR A LIVING 1 Psychology Trading Tactics Money Management by Dr. Alexander Elder

You can be free. You can live and work anywhere in the world. You can be
independent from routine and not answer to anybody.
This is the life of a successful trader.
Many aspire to this but few succeed. An amateur looks at a quote screen
and sees millions of dollars sparkle in front of his face. He reaches for the
money -and loses. He reaches again -and loses more. Traders lose because
the game is hard, or out of ignorance, or lack of discipline.

You may base your trades on fundamental or technical analysis. You may
trade because of hunches about economic and political trends, use "inside
information," or simply hope.
Remember how you felt the last time you placed an order? Were you anxious
to jump in or afraid of losing? Did you procrastinate before picking up
the phone? When you closed out a trade, did you feel elated or humiliated?
The feelings of thousands of traders merge into huge psychological tides that
move the markets.

Getting Off the Roller Coaster
The majority of traders spend most of their time looking for good trades.
Once they enter a trade, they lose control and either squirm from pain or grin
from pleasure. They ride an emotional roller coaster and miss the essential
element of winning-the management of their emotions. Their inability to
manage themselves leads to poor money management of their accounts.
If your mind is not in gear with the markets, or if you ignore changes in
mass psychology of crowds, then you have no chance of making money
trading. All winning professionals know the enormous importance of psychology
in trading. All losing amateurs ignore it.
Friends and clients who know that I am a psychiatrist often ask me

whether this helps me as a trader. Good psychiatry and good trading have
one important principle in common. Both focus on reality, on seeing the
world the way it is. To live a healthy life, you have to live with your eyes
open. To be a good trader, you need to trade with your eyes open, recognize
real trends and turns, and not waste time or energy on regrets and wishful

You can succeed in trading only if you handle it as a serious intellectual
pursuit. Emotional trading is lethal. 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.

Trading appears deceptively easy. When a beginner wins, he feels brilliant
and invincible. Then he takes wild risks and loses everything.
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 do not know
what to do with their freedom.
If you know how to trade, you can make your own hours, live and work
wherever you please, and never answer to a boss. Trading is a fascinating
intellectual pursuit: chess, poker, and a crossword rolled in one. Trading
attracts people who love puzzles and brainteasers.
Trading attracts risk-takers and repels those who avoid risk. An average
person gets up in the morning, goes to work, has a lunch break, returns
home, has a beer and dinner, watches TV, and goes to sleep. If he makes a
few extra dollars, he puts them into a savings account. A trader keeps odd
hours and puts his capital at risk. Many traders are loners who abandon the
certainty of the present and take a leap into the unknown.

Most people have an innate drive to achieve their personal best, to develop
their abilities to the fullest. This drive, along with the pleasure of the game
and the lure of money, propels traders to challenge the markets.

Good traders tend to be hardworking and shrewd men. They are open to
new ideas. The goal of a good trader, paradoxically, is not to make money.
His goal is to trade well. If he trades right, money follows almost as an
afterthought. Successful traders keep honing their skills. Trying to reach
their personal best is more important to them than making money.
A successful New York trader said to me: "If I become half a percent
smarter each year, I'll be a genius by the time I die." His drive to improve
himself is the hallmark of a successful trader.
A professional trader from Texas invited me to his office and said: "If you
sit across the table from me while I day-trade, you won't be able to tell
whether I am $2000 ahead or $2000 behind on that day." He has risen to a
level where winning does not elate him and losing does not deflate him. He
is so focused on trading right and improving his skills that money no longer
influences his emotions.
The trouble with self-fulfillment is that many people have a self-destructive
streak. Accident-prone drivers keep destroying their cars, and selfdestructive
traders keep destroying their accounts (see Section 7). Markets
offer unlimited opportunities for self-sabotage, as well as for self-fulfillment.
Acting out your internal conflicts in the marketplace is a very expensive
Traders who are not at peace with themselves often try to fulfill their contradictory
wishes in the market. If you do not know where you are going,
you will wind up somewhere you never wanted to be.
If you hear from a friend with little farming experience that he plans to feed
himself with food grown on a quarter-acre plot, you will expect him to go
hungry. We all know that one can squeeze only so much blood from a turnip.
The one field in which grown-ups let their fantasies soar is trading.
Just the other day, a friend told me that he expected to support himself
trading his $6000 account. When I tried to show him the futility of his plan,
he quickly changed our topic of conversation. He is a bright analyst, but he
refuses to see that his "intensive farming" plan is suicidal. In his desperate
effort to succeed, he must take on large positions-and the slightest wiggle
of the market is sure to put him out of business.
A successful trader is a realist. He knows his abilities and limitations. He
sees what is happening in the markets and knows how to react to them. He
analyzes the markets without cutting comers, observes his own reactions,
and makes realistic plans. A professional trader cannot afford illusions.
Once an amateur takes a few hits and gets a few margin calls, he becomes
fearful instead of cocky and starts developing strange ideas about the markets.
Losers buy, sell, or miss trades thanks to their fantastic ideas. They act
like children who are afraid to pass a cemetery or look under their bed at
night because they are afraid of ghosts. The unstructured environment of the
market makes it is easy to develop fantasies.
Most people who have grown up in Western civilization have several similar
fantasies. They are so widespread that when I studied at the New York
Psychoanalytic Institute, there was a course called "Universal Fantasies."
For example, most people have a fantasy in childhood that they were
adopted rather than born to their parents. A fantasy seems to explain the
unfriendly and impersonal world. It consoles a child but prevents him from
seeing reality. Our fantasies influence our behavior, even if we are not consciously
aware of them.
In talking to hundreds of traders, I keep hearing them express several universal
fantasies. They distort reality and stand in the way of trading success.
A successful trader must identify his fantasies and get rid of them.

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