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The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management

by Alexander Elder (2014)

Quick summary -- an in-depth PhD-level extended summary (10-30 pages) for this book is coming soon.

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management

Author: Alexander Elder | Categories: Trading Psychology, Risk Management, Technical Analysis, Trading Systems

Executive Summary

"The New Trading for a Living" by Dr. Alexander Elder is a thoroughly revised and updated edition of his 1993 classic, widely regarded as one of the most important trading books ever written. Published in 2014 by Wiley, this edition preserves the original's foundational psychology sections while substantially updating the technical analysis chapters, adding new material on the Impulse system and channel trading, and completely rewriting the risk management section with the introduction of the Iron Triangle of risk control. The book's core argument remains that trading success rests on three pillars--psychology, market analysis, and money management--bound together by meticulous record-keeping.

Elder, a psychiatrist who escaped the Soviet Union and became a professional trader, brings a unique clinical perspective to understanding why traders fail. His thesis is that the key to winning lies inside the trader's mind, not inside any computer system. The book synthesizes individual psychology, mass psychology, classical chart analysis, computerized technical analysis, volume analysis, trading systems, and risk management into a coherent framework for professional-grade trading.

Core Thesis & Arguments

The central thesis is that trading is a minus-sum game where most participants must lose. Success requires mastery of three interdependent domains: self-knowledge (psychology), market knowledge (technical analysis), and capital preservation (risk management). Elder argues that emotional trading is lethal and that the gap between knowing what to do and actually doing it under market pressure is the primary barrier to success.

Key arguments include: (1) Trading is more like psychology than science--understanding crowd behavior matters more than finding the perfect indicator. (2) Markets are fractal, with similar patterns repeating across timeframes. (3) The biggest enemy is not the market but the trader's own undisciplined behavior. (4) Risk management is more important than entry signals--the Two Percent Rule (never risk more than 2% of equity on any single trade) and the Six Percent Rule (stop trading when monthly losses reach 6%) form the foundation of survival.

Chapter-by-Chapter Analysis

Part One: Individual Psychology (Chapters 4-10)

Covers the psychological makeup of traders, the fantasies that destroy accounts (the Brain Myth, the Undercapitalization Myth, the Autopilot Myth), self-destructive tendencies, and lessons from Alcoholics Anonymous adapted for trading. Introduces the concept of "Losers Anonymous" as a framework for behavioral change.

Part Two: Mass Psychology (Chapters 11-16)

Examines what price really represents, how markets function as voting mechanisms, the psychology of trends, and why managing is superior to forecasting. Establishes that price reflects the consensus of value among all market participants at the moment of the trade.

Part Three: Classical Chart Analysis (Chapters 17-20)

Covers charting types, support and resistance, trends and trading ranges, and the Kangaroo Tail pattern. Emphasizes that chart patterns reflect crowd behavior and are essentially applied social psychology.

Part Four: Computerized Technical Analysis (Chapters 21-27)

Covers moving averages, MACD, the Directional System, oscillators, Stochastic, and RSI. Argues that less is more with indicators and that piling up masses of indicators on top of five data points (open, high, low, close, volume) only increases confusion.

Part Five: Volume and Time (Chapters 28-33)

Covers volume analysis, volume-based indicators, Force Index, open interest, and the critical concept of trading timeframes. Introduces the multiple timeframe approach that forms the basis of the Triple Screen system.

Part Six: General Market Indicators (Chapters 34-37)

Covers the New High-New Low Index, percentage of stocks above their 50-day MA, and consensus/commitment indicators for analyzing the broad market.

Part Seven: Trading Systems (Chapters 38-41)

Presents the Triple Screen Trading System, the Impulse System, and Channel Trading Systems. Triple Screen uses three timeframes to filter signals, the Impulse System combines moving averages with MACD-Histogram to identify market conditions, and channel systems use standard deviation envelopes.

Part Eight: Trading Vehicles (Chapters 42-47)

Discusses stocks, ETFs, options, CFDs, futures, and forex, evaluating the advantages and disadvantages of each.

Part Nine: Risk Management (Chapters 48-52)

The completely rewritten section covering the Two Percent Rule, the Six Percent Rule, drawdown recovery, and the Iron Triangle of risk control. Demonstrates mathematically why risk management is the most critical factor in trading survival.

Part Ten: Practical Details (Chapters 53-56)

Covers setting profit targets, placing stops, grading trades (the A-trade concept), and scanning for opportunities.

Part Eleven: Good Record-Keeping (Chapters 57-59)

Presents daily homework routines, trade plan creation and scoring, and trade journal methodology. Argues that the quality of records is the single best predictor of trading success.

Key Concepts & Frameworks

  • Triple Screen Trading System: Uses three timeframes to filter signals--the first screen identifies the trend on a higher timeframe, the second screen applies oscillators on the intermediate timeframe, and the third screen refines entries on the lowest timeframe.
  • The Impulse System: Combines exponential moving average slope with MACD-Histogram slope to color-code bars as bullish (green), bearish (red), or neutral (blue), restricting trading against the impulse.
  • The Two Percent Rule: Never risk more than 2% of trading capital on any single trade, calculated from entry price to stop loss.
  • The Six Percent Rule: Stop all trading for the remainder of the month when open trade risk plus closed losses reach 6% of account equity.
  • The Iron Triangle: The integration of the Two Percent Rule, the Six Percent Rule, and the requirement to grade every trade.
  • A-Trade Concept: Rating potential trades on a scale to ensure only the highest-quality setups are taken.

Practical Trading Applications

  1. Use the Triple Screen method to align trades with the trend on a higher timeframe while entering on pullbacks identified by oscillators on lower timeframes.
  2. Apply the Two Percent Rule to every trade to ensure no single loss can seriously damage the account.
  3. Implement the Six Percent Rule as a circuit breaker during losing streaks to prevent catastrophic drawdowns.
  4. Use the Impulse System to avoid trading against the current market impulse--do not short green bars or buy red bars.
  5. Maintain a detailed trade journal with screenshots, rationale, and post-trade analysis for every position.
  6. Grade every trade before entry using the A-trade framework to filter out mediocre setups.

Critical Assessment

Strengths: The integration of psychology with technical analysis and risk management is unmatched. Elder's psychiatric background gives him genuine insight into trader behavior. The risk management section is exceptionally practical. The writing is clear and accessible. The book has stood the test of time for good reason.

Weaknesses: Some technical analysis chapters feel dated despite the revision. The book could benefit from more discussion of modern market microstructure. The simplified approach to chart patterns may not satisfy advanced technicians.

Best for: Beginning to intermediate traders seeking a comprehensive, integrated approach to trading. Particularly valuable for those who recognize that their psychological challenges are the primary barrier to profitability.

Key Quotes

"A good trader watches his capital as carefully as a professional scuba diver watches his air supply."

"A loser is not undercapitalized--his mind is underdeveloped."

"If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, you have no chance of making money trading."

"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."

Conclusion & Recommendation

"The New Trading for a Living" remains essential reading for any serious trader. Elder's integration of psychology, technical analysis, and risk management into a unified framework is both intellectually rigorous and practically actionable. The book's greatest strength is its honest, clinical assessment of why traders fail and its prescription for building the psychological and procedural foundations necessary for success. The updated risk management section alone justifies reading this edition even for those familiar with the original.