I first read the original version of this book over fourteen years ago, and it was the book that finally cemented for me the overall structure I needed to understand all the dynamics of profitable trading. I have read hundreds of trading books, and this one still stands head and shoulders above the rest. It explains how to manage the risk, overcome negative psychology, and the importance of developing and following a trading method with an edge.
I especially like the clarity of the charts in this new edition. Dr. Elder used charts from the StockCharts.com website, and these are great charts for clarity and easy to use.
If you read and follow the principles in this book, you will make enough money on your trades to pay for this book many times over. I have been an active participate in the markets for over 25 years, as a trader of trends, and I agree with Dr. Elder completely, having experienced the greed, fear, and mistakes that he illustrates. Read this book and save yourself a lot of unnecessary losses of both financial and mental capital.
The first section of this book teaches you the psychology of successful trading:
1) You must be committed to being a trader for the long haul.
2) Learn all that you can, but be skeptical, go with what works.
3) Develop a method for analyzing the market.
4) Develop a plan for proper position sizing.
5) Do not get greedy and rush into trades.
6) Understand that you can be your own worst enemy through greed, fear, and emotions.
7) You must change bad behaviors and bad habits to be a profitable trader.
Dr. Elder explains, in great detail, his own trading tactics and methodology. For example, in the Risk Management section, he covers the most important strategy of when to exit. He suggests setting a stop-loss on every trade so you keep losses small. He also emphasizes the importance of protecting profits with trailing stops as a winning trade goes in your favor, and never risking more than 2% of your account on any one trade based on your position sizing and where your stop loss is placed. He also warns against losing more than 6-8% of your account in any one month, this is a dangerous amount of capital to lose in a short amount of time.
A critical point made by Dr. Elder, is that professionals in any field do not count their money daily. Traders should focus on their trading, and not their daily profits. Traders should focus on following their trading plan and let the profits take care of themselves. Dr. Elder’s background in psychology makes him the perfect person to explain the pitfalls of trading emotionally and without discipline.
Dr. Elder has written one of the most all-encompassing trading books on the market today. You will profit from it, whether you are a beginner or an advanced trader. It will make you more professional and logical, and it will show you that traders are only profitable by trading a winning method, using risk management, and psychological discipline. This book was one of the most important and influential for me in my trading as it brought together the importance of what Dr. Elder calls the three legs of the trading stool. Managing your money, your method, and also your mind, the three M’s that are required for profitable trading over the long term.