New Trader, Rich Trader has been called “The Rich Dad, Poor Dad of trading books”. I wrote this book after reading hundreds of books on trading and reviewing them all on Amazon. The purpose of this book was to combine the universal principles used by successful Rich Traders into one book. This book was given a thumbs up by Chris Kacher, Alexander Elder, and John Boik among many others that are a success in trading.
Here is my favorite review of the book:
The following is a guest book review by Christopher Ebert, who specializes in option correlations and strategies. This review originally appeared on Business Insider.
If you are new to the stock market, don’t place another trade until you have read “New Trader, Rich Trader” by Stephen Burns! Even if you have been trading stocks for years, this book will undoubtedly give you tips to improve your profitability. With the constant bombardment of advertising, it is difficult for new traders to avoid being tricked into thinking that trading is a simple way of making money; indeed, one of the more popular electronic brokers has a baby as its television spokesperson. This book dispels the myth of easy money, but without causing the reader to feel a sense of despair. Rather, it takes the lessons that the author has learned in his more than 12 years of exceptionally successful trading, and imparts that knowledge to anybody willing to devote a few hours of reading time.
“New Trader, Rich Trader” is full of advice for every trader, new or experienced. The methods Burns uses to generate profits are simple, but powerful. Despite the simplicity, even seasoned traders will be surprised to learn of trading mistakes they may be making, and the ways to avoid those errors. He presents a psychological view of trading, that while targeted at the stock market, applies equally well to any type of trading and also to other parts of life. I found myself not only using his tips to improve my stock trading, but to re-evaluate my real estate holdings and dispose of losing investments I realized I was only keeping for psychological reasons.
Burns begins by offering some amazing advice to new traders, evident in such memorable quotes as: “The most dangerous thing you can do is make a great deal of money from the start.” and, “If your stress level is still excessive after you have a working trading plan, then you are either trading too big or don’t have faith in your trading system.” Then, “New Trader, Rich Trader” continues to examine every aspect of the psychology of trading, yielding some invaluable suggestions for every investor, including: “Trade only to make money, not for entertainment or to prove anything about yourself.”, and, “Do your planning and research while the market is closed; trade your system while the market is open.” One of the more intriguing concepts offered, is that consistent profitability requires more than just a proven trading method; Burns shows how a combination of psychology and risk management can make, or break, any trading method.
The book starts with a dialogue between two stock traders, one who has just opened his first account, and his mentor, who has earned millions through many years of trading. The mentor walks the beginner through all the steps necessary to be a good trader. First, he dispels the unreasonable expectations that all beginners have about making instant profits. He even goes so far as to suggest that while most traders lose money their first year, this so called “tuition” is almost a necessary part of learning; something that is required in order to be profitable in the future.
The beginner first learns some basic concepts of trading; that “the key to success is to lose small and win big”; an idea so simple it almost sounds absurd, and yet understanding it is the only way to ensure consistent profits. The remainder of the book is dedicated to the process of designing a trading system that loses small and wins big. Burns shows how trading is not about gambling; although it is possible to gamble with stocks, gambling will eventually result in losses; rather good trading involves management of probability and risk. The new trader learns how to evaluate his trading system based on such things as his winning percentage, his average profit, average draw down, and maximum number of successive losses. Determining these probabilities gives the trader the information he needs to adjust his system for better performance.
- Trade
- General Market
- Volatility
- Overnight
- Liquidity
- Margin
- Earnings
- Political
- Time-decay
- Risk of Error
- Technology
The importance of managing risk is a recurring theme throughout the book. “New Trader, Rich Trader” gives specific advice on how to limit risk, and it should come as no surprise to experienced traders that, far and away, the most important tool for limiting risk is a stop loss; a stop loss that must always be honored.
When I was just starting out in the stock market, I had the same crazy ideas about trading as every new trader has; that all I needed to do was predict when prices were going up, and buy at the appropriate time. Burns consistently drills home the widely accepted belief, among experienced traders, that nobody can consistently predict the stock market. A trader who believes he knows more about a stock than the rest of the world is nothing short of arrogant. Is it really possible to outsmart millions of traders, all with access to the nearly unlimited supply of information via today’s modern technology? Traders, who think they have a hot tip from CNBC, or from a penny stock pumper, are deluding themselves. “New Trader, Rich Trader” avoids trying to predict future stock prices; and instead focuses on how to profit by using historical patterns of price and volume to predict a trade’s future probability of profitability, and weigh it against the risk of expected losses.
Burns makes a great point, for not only continuously reading trading books, but keeping a trading journal, as well as having an accountability partner; another trader with whom he can discuss his ideas; someone to keep him grounded. However, some of the best advice comes in chapter 12, where he compares an aggressive trader with a bargain hunter. It is possible to make money using either strategy, but only if it fits the trader’s personality; “…it would drive the aggressive trader nuts to wait for a pullback that may not even happen, and the bargain buyer would be sick for paying all-time highs…” “New Trader, Rich Trader” clearly shows the importance of choosing a trading style best suited to the trader’s personality. Being uncomfortable about a trade will eventually lead to panic and ultimately lead to abandonment of a proven system. The end result is almost always a strew of losses. Choosing a trading style that makes one comfortable is an easy way to increase the odds of success.
Accepting losses is shown to be an important part of being a good trader. “… losing trades are simply your cost of business; they will be paid for by your winning trades.” Losing real money makes a trader remember his mistakes, and makes it less likely he will repeat those mistakes in the future. The book discourages readers from counting their profits and losses while they are trading. Instead, it implies that it is better to design a proven system and stick to the system, knowing that some losses are inevitable. Burns promotes the use of charts, especially those displaying moving averages and volume, to avoid the temptation of using one’s own opinion to determine the best time to enter a trade.
For any beginning trader, “New Trader, Rich Trader” is the best choice for a first book. Not only does Burns instruct traders on how to become profitable based on his own success in the market, but he draws on the knowledge of many other successful traders. After reading this book, in addition to learning how to make money in stocks, traders will understand which other books need to be read in order to be even more successful. Burns has compiled a list of some of the books that have given him the most help in his career, and included them as suggested reading at the end of each chapter. There are also mind-provoking quotations from other famous traders, although some of the most helpful ones are those that Burns created himself. One in particular, in my opinion, sums up the entire stock market: “The market is going to go where the votes carry it; your job is to vote with the majority.” “New Trader, Rich Trader” gets my vote.