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Tips from Alexander Elder: rule your emotions
Not only is Alexander Elder known for his triple screen trading system, but he also gave traders some really good advice on psychology, risk and money management. In this article, we gathered the most useful recommendations from Elder’s renowned book “Trading for a living”. You will find them below.
- Don’t consider trading an entertainment. Trading is not a game. Be serious if you want to achieve real profit.
- Emotions are dangerous as they lead to irrational decisions. Try to reduce your emotional outbursts and keep a cool head.
- Concentrate on trading itself and not on the money. Never think about how you will spend the money when your trading position is still open. Keep learning and experimenting. Once you increase your knowledge and gain enough experience, the money will come naturally.
“The goal of a successful trader is to make the best trades. Money is secondary.” Alexander Elder
On risk management
- Most accounts suffer from a few big losses or a series of small losses which happen when a distressed trader tries to recover the lost money. On the contrary, a trader who obeys the rules of risk management won’t get into such a dismal situation.
- A trader needs a good trading system that will generate more positive than negative signals. Together with the good risk management, such a system will make a trader prosper in the long run. A good system has few elements (the more indicators you add, the greater the risk that something will go wrong).
- After you have checked your system on the historical data, make sure that you run it for real but in the test regime. History is history and markets are ever changing. Practice on demo account or with a small amount of money on the live account to be sure that your trading system works.
- Don’t try to make a perfect trading system out of a good trading system. As Leo Tolstoy wisely put it, “if you look for perfection, you'll never be content”. What’s more, you can destroy a good thing you have. As a result, if you want something new, don’t mess with a trading system that is working, but apply your energy to other staff, for example, to design the second trading system.
- To find an exit point for your trade, look at technical indicators and instruments rather than on your emotions.
- Place a Stop Loss when you open a trade. It’s recommended to modify a Stop Loss as time goes by and the only way to do that is to move it in the direction of a trade (up for a buy trade and down for a sell trade). Never increase your Stop Losses.
On money management
- Make sure that you are able to stay in the market. One losing trade shouldn't leave you empty-handed. So, don’t let your losses run. Know exactly how much money you are risking in each trade. If it happens that your monthly loss is more than 8% of your account, make a pause in trading, reexamine your trading system. Choose trades which allow you to have small Stop Losses.
- You will need to have many attempts to succeed. As a result, you need to divide your deposit in a way that will allow you to make many trades and to realize multiple trade ideas. In other words, limit the size of each trade by 2% of your equity. Elder called this approach “getting rich slowly”. He says: “Trade to establish the best track record, with steady gains and small drawdowns”.
“An amateur has the same attitude toward trading as an alcoholic has toward drinking. He sets out to have a good time, but winds up destroying himself.” Alexander Elder
3. Can a trader add to an existing position? Yes, if it’s a trend-following that is at a break-even level or is already in profit and the risk on the additional position won’t exceed 2% of your equity.
Do you know why traders who work in banks and hedge funds are on average more successful than individual traders? That’s because they know that they will be fired if they lose more than a limit. As a result, they are more careful and limit losses. Being your own boss, don’t forget to be strict with yourself and not let your losses increase uncontrollably.
Notice that your work doesn’t finish when you close a trade. Make an effort to analyze each transaction. As yourself many questions. What went good/wrong? Did you do everything you should have done? Were you Take Profit and Stop Loss at the optimal levels? Etc. Your own experience is your best information source.
According to the wise Alexander Elder, the main enemies of traders are ignorance and emotion. These are strong adversaries but ones you will be able to defeat if you know what you are fighting. As a diligent scholar, you should always seek to learn more about financial markets and trading. In addition, like a hunter, you need to develop patience and wait until an excellent trade opportunity presents itself.