I read the book "Trading for a Living" many years ago, and recently, I read its second edition, gaining some new insights. Today, I will interpret the essence of this book and share it with you all.

The content of this book is very comprehensive, covering emotional management in trading, discussing the herd effect in the market, explaining trading techniques, and providing detailed money management plans.

Moreover, what is most commendable is that the book explains the entire profit-making process for a trading novice from scratch, which is very close to real combat.

The author, Alexander Elder, is a psychiatrist, and in the book, he uses his very unique perspective to interpret the psychological issues of most traders and offers solutions, which is very instructive.

There is a lot of content in the book, and I will select some of the essence to talk about. If you have time, I still recommend reading the original work.

There is a lot of content, so it is recommended to bookmark for reading. If you feel you have gained something, you can give the article a like, thank you.

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Introduction

Author Elder is a psychiatrist who provides very detailed answers to the psychological issues that we traders often encounter in trading, and he uses "alcoholism" to describe the state of traders entering a frenzy.

At the same time, at the very beginning of the article, he emphasizes that trading success must have three major pillars: trading psychology, trading techniques, and risk management. Today, I will break down these contents into four parts to share.

Part One: Individual PsychologyPart II: Group Psychology

Part III: Trading Systems

Part IV: Risk Management

His content was an eye-opener for me during the phase when I was experiencing losses. No matter what stage you are at in trading, I believe you can gain different insights.

Part I: Individual Psychology

This section primarily discusses how to manage emotions effectively in trading. Drawing from his experience working in a psychiatric hospital, the author uses his experience helping alcoholics to quit drinking to explain methods for controlling trading psychology. Let's take a look.

Traders often fall into two psychological traps: the intelligence trap and the capital insufficiency trap.

In the intelligence trap, traders tend to attribute their losses to "I don't know the secrets of trading." Many people harbor a fantasy that there must be a mysterious method in trading that guarantees success, so they exert all their efforts to search for this method, only to fall into a vicious cycle of continuous losses.

In the capital insufficiency trap, traders believe that their losses are due to not having enough money. This is especially true for those who like to hold onto losing positions, waiting for a long time until their positions are liquidated by market movements, or when they can't withstand the psychological pressure and close their positions at a loss, only for the market to reverse after they've exited.

At this point, traders become extremely angry, thinking that if they just had a little more money and held on for a few more days, they could turn their losses into profits, or even make a fortune. However, the core issue is poor capital management and taking on too much risk in a single trade, which leads to such outcomes.These are the two most common psychological pitfalls that traders can easily fall into.

A losing trader is like an alcoholic.

The author is a psychiatrist who has dealt with many alcoholics and treated them, so he draws on his experience with alcoholism to improve the psychology of trading.

In his book, he mentions that an alcoholic must recognize that alcoholism has completely taken control of their life, and that alcoholism will completely destroy them, before they can truly quit drinking.

The most difficult point is that the alcoholic must admit to themselves that they are an alcoholic, acknowledge that they cannot resist the temptation to drink, and that alcohol is more powerful than themselves, in order to never touch it again, and possibly not for the rest of their lives.

This is indeed very difficult. In real life, none of us wants to be a loser, and even less do we want to admit that we are a loser. But I have crawled out of the quagmire of trading failures, and it was precisely by accepting my own failure and acknowledging my own incompetence that I truly had the courage and opportunity to start over.

Only by thoroughly understanding that the trading market is much stronger than ourselves can we stimulate our inner sense of risk, and only then will we try every means to restrain our trading impulses, treat every trade cautiously, strictly control positions, and make good stops.

For a trader to succeed, they must ensure that risks are controllable. Even if they may misjudge the direction, they should only bear the foreseeable risks and not take on more losses beyond that.

How to become a calm and professional trader? The book provides an advanced checklist.

1. Establish a long-term trading philosophy, starting now, be prepared to trade for at least 20 years. Traders should have a long-term perspective.2. Learn like a sponge.

3. The market will always be there; do not be greedy or hasty in trading, but rather focus on learning more.

4. Determine a method for analyzing the market (trading system).

5. Establish a capital management approach: the first step is to ensure long-term survival, the second step is to achieve stable profits, and the third step is to earn substantial profits. The order of these steps should not be confused.

6. Enhance self-awareness, as humans are the weakest link in trading. Develop a personal method to control emotional decision-making.

7. Continue learning, focusing on self-improvement and the cultivation of one's personality.

Part Two: Group Psychology

Bulls, bears, pigs, and sheep on Wall Street.

The name Wall Street originates from a wall that was used to control the livestock running around in the clearing yards at the southern tip of Manhattan for delivery purposes. Therefore, some agricultural terms have become prevalent among Wall Street traders, such as bulls, bears, pigs, and sheep, which are the most frequently mentioned animals.

Bulls, when fighting, always raise their horns, thus symbolizing the bulls in the market, representing a bull market and making profits.When bears engage in combat, they use their paws to strike downwards at their adversaries, symbolizing a downward trend and representing the bears in the market.

Pigs represent the greedy traders because they always hold positions that are too heavy. The slightest price movement against their positions becomes unbearable for them. Yet, when a trend reverses, they cling to their positions for a long time, reluctant to let go.

Sheep symbolize the passive and timid followers who follow the trend, believe in rumors and expert opinions, and are sometimes trapped in a bull market and at other times surrounded by a bear market. When the market fluctuates, we can sense their presence through the complaints filled with regret.

Using these animals to categorize people in the market is both cruel and realistic, but trading is a game of mutual struggle.

The financial market is a zero-sum game, and for traders, what you earn is the money that others lose.

There are countless pigs and sheep in the market who do not learn, do not manage risk, lack a systematic approach, let their desires ferment, and indulge their human weaknesses, so their fate is to be slaughtered.

Many people do not want to be pigs or sheep, and they also find it offensive to be called pigs or sheep, because losing money is already very annoying, and to have their wounds exposed mercilessly is even more infuriating. However, this is the harsh reality of the financial market.

As we mentioned earlier, only by admitting that one is an alcoholic can one possibly quit drinking. Accepting reality and discarding idealistic illusions is the key to making a profit in the market.

When you are trading in front of your computer, imagine that your hand is reaching into another trader's pocket to take their money. They will surely clutch their pocket tightly and may even attack you, so you must choose the right moment to take the money and leave, ensuring your own safety. Therefore, every step in trading must be taken with utmost caution.

How can one overcome the psychology of the crowd?The author of the book provides two methods.

First: Prepare a trading plan and write it down on paper.

This allows one to know exactly under what conditions to perform what operations. Moreover, the author emphasizes that as long as there are positions held, the plan must not be changed.

Second: Persist in long-term individual thinking and operation.

The author believes that prices are driven by the masses, and over-focusing on prices will lead to the influence of group psychology. Psychological issues are the most vulnerable part of the entire trading process; over-focusing on prices will cause emotions to fluctuate between hope and fear, making it difficult to fully implement one's trading plan.

Third Part: Trading Systems

What is a trading system? It is a complete set of rules for finding, entering, and exiting trades.

Every professional trader may have one or more trading systems, and the author divides trading systems into mechanical trading systems and discretionary trading systems.

A mechanical trading system is a complete set of guidelines, tested for effectiveness using historical data, leaving little room for individual decision-making by the trader.

On the other hand, a discretionary trading system allows for a greater space for the trader's own decision-making, usually with only a few non-negotiable guidelines, especially in risk management, while the rest is subject to the trader's subjective judgment.Mechanical trading systems generally yield more stable results, but they are less likely to experience explosive profit growth. On the other hand, discretionary trading systems are more open in terms of seizing opportunities, but they pose a greater challenge to traders. After all, under pressure and influenced by psychological factors such as greed and fear, humans are more prone to making mistakes.

System testing, paper trading, and individual trade analysis.

Regarding system testing, the author refers to the use of historical data for detection, which is what I often call testing historical market conditions with a backtesting software, typically requiring several years of data.

The author emphasizes several points that need to be tested: the win-loss ratio, the maximum number of consecutive wins or losses, and the maximum drawdown percentage. These are all crucial aspects of a trading system.

As for paper trading, beginners can test their trading systems before going live by conducting paper trades, persisting in execution for several months to see if they can adhere to the system and also to observe the profitability of the trading system.

After completing rigorous paper trading, you can start with individual trades, beginning with small amounts of live trading.

Small amounts of live trading will also bring emotional changes, which can further test the trader. Similarly, if one cannot consistently execute a trading strategy over several months with a small amount, it is unlikely that they will have the discipline to do so with larger amounts.

Additionally, whether it is paper trading or individual small capital trades, it is essential to keep a trading journal.

What is the Triple Screen Trading System?

Firstly, it involves the selection of time frames.Choose a time period that you prefer as the medium term, select a larger scale period as the long term, and pick a smaller cycle as the short term. For instance, you might opt for the hourly chart for the medium term, the daily chart for the long term, and the 15-minute chart for the short term.

Next comes the trading logic.

(1) First, examine the long-term chart to identify the major trend.

(2) Look for opportunities to establish positions in the direction opposite to the long-term trend within the medium-term trend.

(3) Search for entry points in the short term.

(4) Set medium-term stop-losses and long-term take-profit levels.

For example, if the daily chart (long-term trend) is in an uptrend, look for technical reversal points during the downtrend on the hourly chart (medium-term trend), and finally, choose entry opportunities from the 15-minute chart (short-term trend).

Since the long, medium, and short terms can be chosen differently, the triple filter trading system can be used for long-term, medium-term, and intraday trading.

Part Four: Risk Management

The book primarily discusses the 2% rule and the 6% rule regarding risk management.The 2% rule refers to the principle that the maximum loss of any single trade should not exceed 2% of the principal. For example, if you have an account with 50,000 yuan, the maximum loss per trade should be controlled within 1,000 yuan.

The author recommends the "position sizing based on the amount of loss" method.

For instance, if you buy a stock at a price of 40 yuan with a stop-loss line at 38 yuan, the risk of loss per share is 2 yuan. The total tolerable risk is 1,000 yuan, and dividing 1,000 by 2 gives a trading volume of 500 shares.

Of course, the 2% rule means that the maximum loss must not exceed 2%, but you can choose a standard lower than this.

The 6% rule states that when the total losses and position risks of an account reach 6% in a month, no new orders should be opened for the rest of the time.

Here are a few technical points to briefly explain to everyone.

(1) Assuming you are trading with the 2% rule and have 3 orders, with the total risk value already reaching 6%, you should not open a new position when a new trading opportunity arises.

(2) Assuming you are trading with the 2% rule and have already incurred a 2% loss for the month, with 4% remaining, you can only open a maximum of two positions at the same time.

(3) If the held orders have been protected with stop-loss and will not incur further losses, they are not counted within the 6% rule limit. Therefore, the 6% rule supports adding to positions in the direction of the trend.

If the trading system has a high frequency of trades and requires holding multiple orders at the same time, you can reduce the single risk value to 1%, which allows you to open more orders.The 2% rule is designed to control the risk of each individual trade, while the 6% rule is intended to manage the overall drawdown of the account.

This book starkly emphasizes the ruthlessness of the financial markets, which once made it very difficult for me to accept the fact that I was a loser. But later, after repeatedly pondering and reviewing it, and examining myself and my trades from a more objective and holistic perspective, I truly embarked on the right path.