What you should not do is deploy a random mix of strategies, or, even worse, trade with no strategy at all. It is important to know that different strategies will work unevenly for different traders.

Largely, it comes down to choosing a strategy that you can work well with based on your personality type and trading discipline. In general, the more disciplined you are with implementing a profitable strategy, the more money you will make in the forex markets.

In forex trading, backtesting means running your strategy on historical forex data covering a considerable period of real-world trading events. Popular time spans for backtesting include 10 years, 30 years, and 50 years. To get historical forex data, you can either buy it from research firms or scrap together free data from providers like Yahoo Finance. Some of the most successful American forex traders include individuals like George Soros, Bruce Kovner, and Andrew Krieger.

Soros is famous for helping break the British Pound in You can learn from such successful traders by studying their strategies and implementing them yourself. One under-appreciated learning avenue is to consult your library or bookstore for currency trading books by successful individuals.

Many of the most successful currency traders have written books to serve as a guide to future generations and beginner forex traders. As you become more advanced in your forex trading, the time may come for you to consider stepping into the forex options arena. Trading forex options come with even more volatility and leverage than trading the underlying currencies. As with most things in the financial markets, this presents significant upside as well as great risk.

You should always err on the side of caution in order to preserve trading capital. Sticking to fundamentals, like the use of stop losses and getting out of bad positions, will give you the best chances for long-term success. Skip to content Home Trading Forex Trading Forex for a Living Pdf. How to Open a Brokerage Account for Trading Forex To begin trading forex in the US, you need to open an account with a registered forex broker.

Read: Am I Aloud to Trade Forex for Other People. Part Five will focus on them as well as on the passage of time in the markets. Crowds have short attention spans, and a trader who relates price changes to time gains a competitive advantage.

Part Six will focus on the best tools for analyzing the stock market as a whole. They can be especially helpful for stock index futures and options traders. Part Seven will present several trading systems.

Part Eight will discuss several classes of trading vehicles. It will outline pluses and minuses of equities, futures, options, and forex, while blowing away the promotional fog that clouds some of these markets.

Part Nine will lead you into the all-important topic of money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your risk management is poor, then a short string of losses will destroy your account. Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, and scanning. These practical details will help you implement any system you like.

THE ODDS AGAINST YOU 5 Part Eleven will guide you through the principles and templates of good record- keeping. The quality of your records is the single best predictor of your success. Last but not least, this book has a separate Study Guide. It asks over questions, each linked to a specific section of the book. All questions are designed to test your level of understanding and discover any blind spots.

You are about to spend many hours with this book. When you find ideas that look important to you, test them in the only way that matters—on your own mar- ket data and in your own trading.

You will make this knowledge your own only by questioning and testing it. The Odds against You Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage.

You pay commissions for entering and exiting trades. Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or better, or not at all. Most amateurs are unaware of the harm done by commissions and slippage, just as medieval peasants could not imagine that tiny invisible germs could kill them.

The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets, while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves.

Losers bring money into the markets, which is necessary for the prosperity of the trading industry. A Minus-Sum Game Winners in a zero-sum game make as much as losers lose. A single bet has a component of luck, but the more knowl- edgeable person will keep winning more often than losing over a period of time.

For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end.

A trader must sup- port his broker and the machinery of exchanges before he collects a dime. You have to be head and shoulders above the crowd to win a minus-sum game. Commissions Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value.

Fortunately for traders, commission rates have plummeted. Without proper care, even seemingly small numbers can raise a tall barrier to success. Shop for the lowest possible commissions. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time. Design a trading system that will trade less often.

A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade. Slippage Slippage means having your orders filled at a different price than what you saw on the screen when you placed your order. It is like paying 50 cents for an apple in a grocery store even though the posted price is 49 cents.

There are two main types of orders: market and limit. Your slippage depends on which of these types you use. If prices of apples are rising when you place your order, you may well pay more than you saw on the screen when you pushed the buy button. You may get hit by slippage. Slippage on market orders rises with market volatility.

When the market begins to run, slippage goes through the roof. Do you have any idea how much slippage costs you? There is only one way to find out: write down the price at the time you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts.

Needless to say, you need a good record-keeping system, such as a spreadsheet with columns for each of the above numbers. We offer such a spread- sheet to traders as a public service at www. Remember that good record-keeping is essential for your success.

You have to keep an eye on your wins and an even sharper eye on your losses because you can learn much more from them. Earlier we talked about commissions raising a barrier to success. The barrier from slippage is three times higher.

There are thou- sands of stocks and dozens of futures contracts. Do not overpay! I almost always use limit orders and resort to market orders only when placing stops. When a stop level gets hit, it becomes a market order. Get in slow but get out fast. Go long or short when the market is quiet, and use limit orders to buy or sell at specified prices. Keep a record of prices at the time you placed your order.

Demand your broker fight the floor for a better fill when necessary. Bid-Ask Spreads Whenever the market is open, there are always two prices for any trading vehicle—a bid and an ask. A bid is what people are offering to pay for that security at that mo- ment; an ask is what sellers are demanding in order to sell it.

A bid is always lower, an ask higher, and the spread between them keeps changing. Bid-ask spreads vary between different markets and even in the same market at different times.

Bid-ask spreads are higher in thinly traded vehicles, as the pros who dominate such markets demand high fees from those who want to join their party. The bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day in an actively traded stock, future or option.

They grow wider as prices accelerate on the way up or down and may become huge—dozens of ticks—after a severe drop or a very sharp rally. Market orders get filled at the bad side of bid-ask spreads. A market order buys at the ask high and sells at the bid low. Little wonder that many professional trad- ers make a good living from filling market orders.

The Barriers to Success Slippage and commissions make trading similar to swimming in a piranha-infested river. The cost of computers and data, fees for advisory services and books—including the one you are reading now—all come out of your trading funds.

Look for a broker with the cheapest commissions and watch him like a hawk. Design a trad- ing system that gives signals relatively infrequently and allows you to enter markets during quiet times.

Use limit orders almost exclusively—except when placing stops. Be careful on what tools you spend money: there are no magic solutions.

Success cannot be bought, only earned. Trading appears deceptively easy. A beginner may cautiously enter the market, win a few times, and start feeling brilliant and invincible. People trade for many reasons—some rational and many irrational. Trading offers an opportunity to make a lot of money in a hurry. If you know how to trade, you can make your own hours, live and work anywhere you please, and never answer to a boss. Trading is a fascinating game: chess, poker, and a video game rolled into one.

Trading attracts people who love challenges. It 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 sav- ings account. A trader keeps odd hours and puts his capital at risk. Many traders are loners who abandon the certainties of the routine and take a leap into the unknown.

Self-Fulfillment Many 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 people, open to new ideas.

The goal of a good trader, paradoxically, is not to make money. His goal is to trade well. Successful traders keep honing their skills as they try to reach their personal best. He is so focused on trading right and im- proving his skills that money no longer influences his emotions. The trouble with self-fulfillment is that many people have self-destructive streaks. Accident-prone drivers keep destroying their cars, and self-destructive traders keep destroying their accounts.

Markets offer vast opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is a very expensive proposition. Traders who are not at peace with themselves often try to fulfill their contradic- tory wishes in the markets. One can squeeze only so much from a small piece of land. There is, how- ever, a field in which grown-ups let their fantasies fly—in trading.

When I tried to show him the futility of his plan, he quickly changed the topic. A successful trader is a realist. He knows his abilities and limitations. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional trader cannot afford illusions. Once an amateur takes a few hits and gets a few margin calls, he swings from cocky to fearful and starts developing strange ideas about the markets.

Losers buy, sell, or avoid trades due 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 easy to develop fantasies. Most people who grow up in Western civilization have several similar fantasies. This fantasy seems to explain the un- friendly and impersonal world. REALITY VERSUS FANTASY 11 In talking to hundreds of traders, I keep hearing several universal fantasies.

They distort reality and stand in the way of trading success. A successful trader must iden- tify his fantasies and get rid of them. That fantasy helps support a lively market in advisory services and ready-made trading systems. At an investment club we used to have in New York, I often ran into a famous financial astrologer.

His main source of income remains collecting money for astrological trading predictions from hopeful amateurs. It is nowhere near as demanding as taking out an appendix, building a bridge, or trying a case in court. Good traders are shrewd, but few are intellectuals.

Many have never been to college, and some have dropped out of high school. Intelligent and hardworking people who have succeeded in their careers often feel drawn to trading. Why do they fail so often? The Undercapitalization Myth Many losers think that they would trade successfully if they had a bigger account. People destroy their accounts either by a string of losses or a single abysmally bad trade.

Often, after the loser is sold out, unable to meet a margin call, the market reverses and moves in the direction he expected. He starts fuming: had he survived another week, he would have made a fortune instead of losing!

Such people look at market reversals that come too late and think that those turns confirm their methods. They may go back to work and earn, save, or borrow enough money to open another small account.

But even if they raise more money, they lose that, too—as if the market were laughing at them! A loser is not undercapitalized—his mind is underdeveloped. A loser can destroy a big account almost as quickly as a small one. An acquaintance of mine once blew out over million dollars in a day. His broker sold him out—and then the market turned.

He takes risks that are too big for his account size, however small or big. No mat- ter how good his system may be, a streak of bad trades is sure to put him out of business. Amateurs neither expect to lose nor are prepared to manage losing trades.

Calling themselves undercapitalized is a cop-out that helps them avoid two painful truths: their lack of a realistic money management plan and lack of discipline. A trader who wants to survive and prosper must control losses. Learn from cheap mistakes in a small account. The one advantage of a large trading account is that the price of equipment and services represents a smaller percentage of your money. The Autopilot Myth Traders who believe in the autopilot myth think that the pursuit of wealth can be automated.

Some people try to develop an automatic trading system, while others buy systems from vendors. Men who have spent years honing their skills as lawyers, doctors, or businessmen plunk down thousands of dollars for canned competence. Most are driven by greed, laziness, and mathematical illiteracy. Systems used to be written on sheets of paper, but now they get downloaded on a computer.

Some are primitive; others are elaborate, with built-in optimization and even money management rules. Many traders spend thousands of dollars searching for magic that will turn a few pages of computer code into an endless stream of money. People who pay for automatic trading systems are like medieval knights who paid alchemists for the secret of turning base metals into gold. Complex human activities do not lend themselves to automation.

Most human activities call for an exer- cise of judgment; machines and systems can help but not replace humans. Had there been a successful automatic trading system, its purchaser could move to Tahiti and spend the rest of his life at leisure, supported by a stream of checks from his broker.

They form a small but colorful cottage industry. If their systems worked, why would they sell them? They could move to Tahiti themselves and cash checks from their brokers!

Meanwhile, every system seller has a line. REALITY VERSUS FANTASY 13 programming better than trading. Others claim that they sell their systems only to raise capital or even out of love for humanity. Markets are always changing and defeating automatic trading systems. A competent trader can adjust his methods when he detects trouble. An automatic system is less adaptable and self-destructs. Airlines pay high salaries to pilots despite having autopilots. They do it because humans can handle unforeseen events.

When a roof blows off an airliner over the Pacific or when a passenger jet loses both engines to a flock of geese over Manhat- tan, only a human can handle such crises. These emergencies have been reported in the press, and in each of them, experienced pilots managed to land their airliners by improvising solutions.

No autopilot can do that. Betting your money on an automatic system is like betting your life on an autopilot. The first unexpected event will make your account crash and burn. There are good trading systems out there, but they have to be monitored and ad- justed using individual judgment. You have to stay on the ball—you cannot abdicate responsibility for your success to a mechanical system. Traders with autopilot fantasies try to repeat what they felt as infants.

Their mothers used to fulfill their needs for food, warmth, and comfort. Now they try to recreate the experience of passively lying on their backs and having profits flow to them like an endless stream of free, warm milk. The market is not your mother. It consists of tough men and women who look for ways to take money from you rather than pouring warm milk into your mouth.

When I was growing up in the former Soviet Union, children were taught that Stalin was our great leader. Later we found out what a monster he was, but while he was alive, most people enjoyed following the leader. He freed them from the need to think for themselves. There are three types of gurus in the financial markets: market cycle gurus, magic method gurus, and dead gurus. Cycle gurus call important market turns. Method gurus promote new highways to riches. Still others have escaped criticism and in- vited cult following through the simple mechanism of departing this world.

Market Cycle Gurus For many decades, the U. stock market has generally followed a four-year cycle. The broad stock market has normally spent 2. A new market cycle guru emerges in almost every major stock cycle, once every 4 years. The reigning period of each guru coincides with a major bull market in the United States. A market cycle guru forecasts rallies and declines.

Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his pronounce- ments. A market cycle guru has a pet theory about the market. That theory—cycles, volume, Elliott Wave, whatever—is usually developed several years prior to reaching stardom. Compare this to what happens to fashion models as public tastes change.

One year, blondes are popular, another year, redheads. Everybody wants a dark model, or a woman with a birthmark on her face. Gurus always come from the fringes of market analysis. They are never establish- ment analysts. Institutional employees play it safe—afraid to stick their necks out— and almost never achieve spectacular results.

A market cycle guru is an outsider with a unique theory. A guru remains famous for as long as the market behaves according to his the— ory—usually for less than the duration of one 4-year market cycle. At some point, the market changes and starts marching to a different tune. A guru continues to use old methods that worked so well in the past and loses his following.

All market cycle gurus have several traits in common. They become active in the forecasting business several years prior to reaching stardom. Each has a unique theory, a few followers, and some credibility, conferred by sheer survival in the ad- visory business. When the theory becomes correct, the mass media take notice. When a theory stops working, mass adulation turns to hatred. When you recognize that a successful new guru is emerging, it may be profitable to jump on his bandwagon.

All gurus crash—and by definition, they crash from the height of their fame. The mainstream media is wary of outsiders. When several mass magazines devote space to a hot market guru, you know that his end is near. Mass psychology being what it is, new gurus will continue to emerge. Traders always look for an edge, an advantage over fellow traders. Like knights shopping for swords, they are willing to pay handsomely for their trading tools.

No price is too high if it lets them tap into a money pipeline. REALITY VERSUS FANTASY 15 A magic method guru sells a new set of keys to market profits—speedlines, cy- cles, Market Profile, etc. It may have an edge in the beginning, but as soon as enough people become familiar with a new method and test it in the markets, it inevitably deteriorates and starts losing popularity. Oddly enough, even in this era of global communications, reputations change slowly. A guru whose image has been destroyed in his own country can make money peddling his theory overseas.

That point has been made to me by a guru who com- pared his continued popularity in Asia to what happens to faded American singers and movie stars. They are unable to attract an audience in the United States, but they can still make a living singing abroad. Dead Gurus The third type of a market guru is a dead guru. The dead guru is no longer among us and cannot capitalize on his fame. Other promoters profit from his reputation and expired copyrights.

One dear-departed guru is R. Elliott, but the best example of such a legend is W. I interviewed W. He told me that his famous father could not support his family by trading but earned his living by writing and selling instructional courses. He could not afford a secretary and made his son work for him. When W. The legend of W. Gann, the giant of trading, is perpetuated by those who sell courses and other paraphernalia to gullible customers.

The Followers of Gurus A guru has to produce original research for several years, then get lucky when the market turns his way. While some gurus are dead, those who are alive range from serious academic types to great showmen.

To read about scandals surrounding many gurus, try Winner Takes All by William R. When we pay a guru, we expect to get back more than we spend. We act like a man who bets a few dollars against a three-card Monte dealer on a street corner. He hopes to win more than he put down on an overturned crate. Only the ignorant or greedy take the bait.

Some people turn to gurus in search of a strong leader. They look for a parent-like omniscient provider. 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.

A guru is someone claiming to lead the crowds across the desert for a donation. No such pitches here! I always begin by explaining that there are no magic methods, that the field of trading is as huge and diverse as that of medicine, where one needs to choose one specialty and work hard to become good at it. I chose my path a long time ago, and what I do in front of a class is simply think out loud, sharing my modes of research and decision making.

Trade with Your Eyes Open Wishful thinking is stronger than dollars. Recent research has proven that people have a prodigious ability to lie to themselves and avoid seeing the truth. Duke University professor Dan Ariely describes a clever experiment. Needless to say, they score above the rest. Next, everybody is asked to predict their grades on the next IQ test, in which there will be absolutely no cheat sheets—and those who predict correctly will get paid.

Surprisingly, the half of the group that scored higher with cheat sheets predicted higher results for the next test. The cheat- ers wanted to believe they were very smart, even though their incorrect predictions of success would cost them money. A successful trader cannot afford wishful thinking—he must be a realist. There are no cheat sheets in the markets—you can see the truth in your trade diaries and equity curves.

To win in the markets, we need to master three essential components of trading: sound psychology, a logical trading system, and an effective risk management plan. These are like three legs of a stool—remove one and the stool will fall. It is a typical beginner mistake to focus exclusively on indicators and trading systems. You have to analyze your feelings as you trade to make sure that your decisions are sound.

Your trades must be based on clearly defined rules. Self-Destructiveness Trading is a very hard game. A trader who wants to win and remain successful in the long run has to be extremely serious about his craft. He cannot afford to be naive or to trade because of some hidden psychological agenda. Unfortunately, trading often appeals to impulsive people, gamblers, and those who feel that the world owes them a living. The markets are un- forgiving, and emotional trading always results in losses.

It exists in all societies, and most people have gambled at some point in their lives. Freud believed that gambling was universally attractive because it was a substitute for masturbation. The repetitive and exciting activity of the hands, the irresistible urge, the resolutions to stop, the intoxicating quality of pleasure, and the feelings of guilt link gambling and masturbation.

Ralph Greenson, a prominent California psychoanalyst, has divided gamblers into three groups: the normal person who gambles for diversion and who can stop when he wishes; the professional gambler, who selects gambling as his means of earning a livelihood; and the neurotic gambler, who gambles because he is driven by unconscious needs and is unable to stop.

A neurotic gambler either feels lucky or wants to test his luck. Winning gives him a sense of power. He feels pleased, like a baby feeding at a breast. In the end, a neurotic gambler always loses because he tries to recreate that omnipotent feeling of bliss instead of concentrating on a realistic long-term game plan. Women tend to gamble as a means of escape. Losers usually hide their losses and try to look and act like winners, but are plagued by self-doubt.

Trading stocks, futures, and options gives a gambler a high, while looking more respectable than betting on the ponies. Gambling in the financial markets has a greater aura of sophistication than playing numbers with a bookie.

Gamblers feel happy when trades go in their favor. They feel terribly low when they lose. The key sign of gambling is the inability to resist the urge to bet. If you feel that you are trading too much and the results are poor, stop trading for a month.

This will give you a chance to re-evaluate your trading. If the urge to trade is so strong that you cannot stay away from the action for a month, then it is time to visit your local chapter of Gamblers Anonymous or start using the principles of Alcoholics Anonymous, outlined later in this chapter.

Self-Sabotage After practicing psychiatry for decades, I became convinced that most failures in life are due to self-sabotage. We fail in our professional, personal, and business affairs not because of bad luck or incompetence, but to fulfill an unconscious wish to fail.

A brilliant friend of mine had a lifelong history of demolishing his success. As a young man, he was a successful pharmacist but lost his business; became a broker and rose near the top of his firm but was sued; turned to trading but busted out while disentangling himself from previous disasters.

He blamed all his failures on envious bosses, incompetent regulators, and an unsupportive wife. He had no job and no money. He borrowed a quote ter- minal from another busted-out trader and raised capital from a few people who had heard that he had traded well in the past. He started making money for his pool, and as the word spread, more people invested. My friend was on a roll. At that point, he went on a speaking tour of Asia but continued to trade from the road.

He took a side trip into a country famous for its brothels, leaving a very large open position in bond futures, with no protective stop. By the time he returned to civilization, the market had staged a major move and his pool was wiped out. Did he try to figure out his problem? To learn? No—he blamed his broker! After- wards I helped him get an attractive job at a major data company, but there he be- gan to bite the hands that fed him and was fired.

In the end, this brilliant man was going door to door, selling aluminum siding—while others made money using his techniques. When traders get in trouble, they tend to blame others, bad luck, or anything else.

It hurts to look within yourself for the cause of your failure. A prominent trader came to me for a consultation. His equity was being demol- ished by a rally in the U. dollar, in which he was heavily short. He had grown up fighting an abusive and arrogant father. He had made a name for himself by betting large positions on reversals of established trends. This trader kept adding to his short position because he could not admit that the market, which represented his father, was bigger and stronger than he was.

These are just two examples of how people act out their self-destructive tenden- cies. We sabotage ourselves by acting like impulsive children rather than intelligent adults.

We cling to our self-defeating patterns. They can be treated—failure is a cur- able disease. The mental baggage from childhood can prevent you from succeeding in the markets. You have to identify your weaknesses and work to change. Keep a trading diary—write down your reasons for entering and exiting every trade. Look for repetitive patterns of success and failure. The Demolition Derby All society members make small allowances to protect one another from the conse- quences of their mistakes.

When you drive, you try to avoid hitting other cars, and they try to avoid hitting you. If someone cuts in front of you on a highway, you may curse, but you will slow down. If someone swings open the door of a parked car, you swerve.

You avoid collisions because they are costly for both parties. Almost all professions provide safety nets for their members. Your bosses, col- leagues, and clients will warn you when you behave badly or self-destructively. There is no such safety net in trading, which makes it more dangerous than most human endeavors. The markets offer endless opportunities to self-destruct.

Buying at the high point of the day is like swinging your car door open into the traffic. When your order to buy reaches the floor, traders rush to sell to you—to tear off your door along with your arm. Other traders want you to fail because when you lose they get your money.

Every trader gets hit by others. Every trader tries to hit others. The trading highway is littered with wrecks. Trading is the most dangerous human endeavor, short of war.

Controlling Self-Destructiveness Most people go through life making the same mistakes decade after decade. Some structure their lives to succeed in one area, while acting out their internal conflicts in another.

You need to be aware of your tendency to sabotage yourself. Stop blaming your losses on bad luck or on others, and take responsibility for your results. Start keeping a diary—a record of all your trades, with reasons for entering and exiting them. A trader needs a psychological safety net the way a mountain climber needs his survival gear.

I found the principles of Alcoholics Anonymous, outlined below, to be of great help at an early stage of trader development. Strict money management rules also provide a safety net, while the diary helps you learn from your mistakes as well as successes.

Trading Psychology Your success or failure as a trader depends on your emotions. You may have a brilliant trading system, but if you feel arrogant, frightened, or upset, your account is sure to suffer. In trading, you compete against the sharpest minds in the world.

Commissions and slippage slant the field against you. Now, on top of that, if you allow your emo- tions to interfere with your trading, the battle is lost. My friend and partner in SpikeTrade. Many traders with good systems wash out because psychologically they are not prepared to win. Bending the Rules Markets offer enormous temptations, like walking through a gold vault or through a harem.

Those feelings cloud our perceptions of market reality. Most amateurs feel like geniuses after a short winning streak. It is exciting to believe that you are so good that all your trades are sure to be winners. Traders gain some knowledge, win, their emotions kick in, and they self-destruct. The hallmark of a successful trader is the ability to ac- cumulate equity.

Be sure to follow money man- agement rules. Keep a spreadsheet listing all your trades, including commissions and slippage. At the early stages of your trading career, you may have to devote as much energy to analyzing yourself as analyzing the markets.

When I was learning to trade, I read every book on trading psychology I could find. Many writers offered sensible advice. Plan a trade, and trade a plan. Change your plans when markets change. Others advised being open-minded, keeping in touch with other traders, and soaking up fresh ideas.

Each piece of advice seemed to make sense, but they contradicted one another. I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected—until I had a sudden insight.

The idea that changed how I trade came from psychiatry. The Insight That Changed My Trading Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program. Psychotherapy, medications, and expensive hospitals and clinics can sober up a drunk but seldom succeed in helping him remain sober. Most addicts quickly re- lapse. They have a much better chance to recover if they become active in Alcoholics Anonymous AA and similar self-help groups.

Once I realized that AA members were more likely to stay sober and rebuild their lives, I became a big fan of Alcoholics Anonymous. I began sending patients with drinking problems to AA and related groups, such as ACOA Adult Children of Alcoholics. I jumped at a chance to attend an AA meeting—it was a new experience. The meeting was held at a local YMCA.

A dozen men and a few women sat on folding chairs in a plain room. The meeting lasted an hour. I was amazed by what I heard—these people seemed to talk about my trading! My account equity was swinging up and down in those days. I left that meeting knowing that I had to handle my losses the way AA handles alcoholism. Trading Lessons from AA Almost any drunk can stay sober for a few days—until the urge to drink drives him back to the bottle.

He cannot resist as long as he continues to think and feel like an alcoholic. Alcoholics Anonymous AA has a system for changing the way people think and feel about drinking.

AA members use a step program for changing their minds. These 12 steps, described in the book Twelve Steps and Twelve Traditions, refer to 12 stages of personal growth. Recovering alcoholics attend meetings where they share their experiences with other recovering alcoholics, supporting each other in their sobriety. Any member can get a sponsor—another AA member whom he can call for support when he feels the urge to drink.

AA was founded in the s by two alcoholics—a doctor and a traveling sales- man who began meeting to help each other stay sober. They developed a system that worked so well, others began to join them. AA has only one goal—to help its mem- bers stay sober.

AA keeps growing thanks only to word of mouth and owes its success only to its effectiveness. The step program of AA is so effective that people with other problems now use it.

There are step groups for children of alcoholics, gamblers, and others. Once an alcoholic takes a drink, he feels an urge to continue until he passes out or his money runs out. He is about to lose the roof over his head. His life is spinning out of control—but he keeps saying that he can cut down on his drinking. This is denial! Alcoholics deny their problems while their lives are falling apart. Nothing will ever change, even if he gets a new job, a new wife, and a new landlord.

Alcoholics deny that alcohol controls their lives. When they talk of reducing drinking, they talk about managing the unmanageable. They are like a driver whose car spins out of control on a mountain road. There is a stark parallel between an alcoholic and a trader whose account is being demol- ished by losses. As he keeps changing his trading tactics, he acts like an alcoholic who tries to solve his problem by switching from hard liquor to beer.

Rock Bottom A drunk can begin his journey to recovery only after he admits that he is an alcoholic. He must see that alcohol controls his life and not the other way around. Most drunks cannot accept this painful truth. They can face it only after they hit rock bottom. Some alcoholics hit rock bottom when they develop a life-threatening illness. Others hit it after being rejected by their family or losing a job.

An alcoholic needs to sink to a point so low, so deep down in the gutter, so unbearably painful that it finally penetrates his denial. The pain of hitting rock bottom makes an alcoholic see how deep he has sunk. He sees a simple stark choice—either turn his life around or die. Only then is an alco- holic ready to begin his journey to recovery. Profits give traders an emotional high and a feeling of power. They try to get high again, put on reckless trades, and give back their profits.

Most traders cannot stand the pain of severe losses. They die as traders after hitting rock bottom and wash out of the markets. The few survivors realize that the main trouble is not with their methods—it is with their thinking. They can change and become successful traders. The First Step An alcoholic who wants to recover has to go through twelve steps—twelve stages of personal growth.

He needs to change how he thinks and feels, how he relates to himself and others. The first step of AA is the hardest: to admit that one is powerless over alcohol. An alcoholic must recognize that his life has become unmanageable, that alcohol is stronger than he is.

Most cannot take that step, drop out, and go on to destroy their lives. If alcohol is stronger than you, then you can never touch it again, not even a sip, for as long as you live. You have to give up drinking forever.

Most drunks do not want to give up that pleasure. They destroy their lives rather than take the first step of AA. Only the pain of hitting rock bottom can motivate them to take that first step. Planning for life without alcohol can seem overwhelming. LOSERS ANONYMOUS 23 The goal of every AA member is to stay sober today and go to bed sober tonight.

Gradually, days become weeks, then months, then years. AA meetings and other activities help each recovering alcoholic stay sober, one day at a time. Recovering alcoholics receive—and give others—invaluable support and fellow- ship at these meetings.

They are held at all hours, all over the world. Traders have much to learn from those meetings. An AA Meeting One of the best things that a trader can do is go to an AA meeting. I especially recom- mend it to any trader on a losing streak. A meeting lasts about an hour. You can sit in the back of the room and listen care- fully. There is no pressure to speak, and nobody asks for your last name. Each meeting begins with a long-term member getting up and speaking about his or her personal struggle for recovery from alcoholism.

Several other members share their experiences. There is a collection to cover expenses—give a dollar if you like. You will feel as if the people in the meeting are talk- ing about your trading! Losers Anonymous A social drinker enjoys an occasional drink, but an alcoholic craves alcohol. He de- nies that alcohol controls and destroys his life—until he reaches a personal crisis. It may be a life-threatening illness, unemployment, abandonment by the family, or another unbearably painful event.

He sees a stark choice—to drown or to come up for air. His first step to recovery is to admit that he is powerless over alcohol. A recovering alcoholic can never drink again. Loss is to a loser what alcohol is to an alcoholic. A small loss is like a single drink. A big loss is like a bender. A series of losses is like an alcoholic binge. A loser keeps switching between different markets, gurus, and trading systems. His equity shrinks while he is trying to recreate the pleasurable sensation of winning.

Losing traders think and act like alcoholics, except that their speech is not slurred. The two groups are so similar that you can predict what a loser will do by using alcoholics as a model. Alcoholism is a curable disease—and so is losing. Losers can change by using the principles of Alcoholics Anonymous. The Urge to Trade Successful traders treat drawdowns the way social drinkers treat alcohol.

They have a little and stop. Losers, on the other hand, cannot stop—they keep trading because they are addicted to the excite- ment of the game and keep hoping for a big win. A prominent trading advisor who has since busted out wrote that to him the pleasure of trading was higher than that of sex or flying jet aircraft.

Just as alcoholics proceed from social drinking to drunkenness, losers take bigger and bigger risks. They cross the hugely important line: the one between taking a business risk and gambling. Losers feel the urge to trade, just as alcoholics feel the urge to drink.

They make impulsive trades, go on trading binges, and try to trade their way out of a hole. Losers bleed money from their accounts. Most losers hide their losses from themselves and from everyone else. They keep no records and throw away brokerage statements. If he knew, he would have done something about it and become a winner. A loser tries to manage his trad- ing the way an alcoholic tries to manage his drinking.

They switch to new trading systems, buy more software, and look for tips from new gurus. As losses mount and equity shrinks, a loser grows desperate and converts outright positions into spreads, doubles up on losing positions, reverses and trades in the op- posite direction, and so on.

All of that does him no more good than switching from hard liquor to wine can help an alcoholic. A losing trader careens out of control, trying to manage the unmanageable. Al- coholics die prematurely, and most traders bust out of the markets and never come back. New trading methods, hot tips, and improved software will not help a person who cannot handle himself.

A loser keeps getting high from trading while his equity shrinks. Trying to tell him that he is a loser is like trying to take a bottle away from a drunk. A loser has to hit rock bottom before he can begin to recover.

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Click the button below to learn more. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF. TRADING FOR A LIVING. Geo Murali. Continue Reading Download Free PDF. Related Papers. Download Free PDF View PDF. Trend Trading for a Living This page intentionally left blank Trend Trading for a Living Learn the Skills and Gain the Confidence to Trade for a Living.

The 10 Essentials of Forex Trading -free-ebook-download. The Art of Japanese Candlestick Charting. Herbst CHAOS AND ORDER IN THE CAPITAL MARKETS Edgar E. Peters INSIDE THE FINANCIAL FUTURES MARKETS, 3RD EDITION Mark J. Powers and Mark G. Castelino RELATIVE DIVIDEND YIELD Anthony E. Spare SELLING SHORT Joseph A. Wunnicke, David R. Chorafas THE DAY TRADER'S MANUAL William F. Eng OPTION MARKET MAKING Allen J. Sullivan Brown TRADING FOR A LIVING Dr. Alexander Elder STUDY GUIDE FOR TRADING FOR A LIVING Dr.

Alexander Elder Director Financial Trading Seminars, Inc. PageMakera is a registered trademark of Aldus Corporation. Copyright O by Dr. All rights reserved. Published simultaneously in Canada. Reproduction or translation of any part of this work beyond that permitted by Section or of the United States Copyright Act without the permission of the copyright owner is unlawful.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the pub- lisher is not engaged in rendering legal, accounting, or other professional service.

If legal advice or other expert assistance is required, the services of a competent pro- fessional person should be sought. From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. Includes bibliographical references and index. ISBN 1. Options Futures I. E43 Trading -The Last Frontier 2. Psychology Is the Key 3. The Odds Against You I Individual Psychology 4. Why Trade? Fantasy versus Reality 6.

Market Gurus 7. Self-Destructiveness 8. Trading Psychology 9. Trading Lessons from AA Losers Anonymous Winners and Losers I1 Mass Psychology What Is Price? What Is the Market? The Trading Scene The Market Crowd and You Psychology of Trends Charting Support and Resistance Trend and Trading Range Trendlines Gaps Chart Patterns IV Computerized Technical Analysis Computers in Trading Moving Averages Moving Average Convergence-Divergence MACD and MACD- Histogram The Directional System Momentum, Rate of Change, and Smoothed Rate of Change Stochastic Volume Volume-Based Indicators Open Interest Herrick Payoff Index Time VI Stock Market Indicators New High-New Low Index Traders' Index and Other Stock Market Indicators VII Psychological Indicators Consensus Indicators Elder-ray Force Index IX Trading Systems Triple Screen Trading s y s t e r n e - Parabolic Trading System Channel Trading Systems X Risk Management Emotions and Probabilities Money Management TRADING-THE LAST FRONTIER 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.

However, the exits were on a break of the day high or low depending on whether you were long or short. To read about the scandals that surrounded many gurus, try Winner Takes All by William Gallacher and The Dow Jones Guide to Trading Systems by Bruce Babcock. A limit order is an order to buy when the market goes lower or to sell the market when it rallies. Note that there are not too many changes. Trading forex does not incur any commis- sions and futures commissions are much lower now so I doubt that this factor is so important anymore. Sullivan Brown TRADING FOR A LIVING Dr.

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