Trading for a Living

Another great book being read, “Trading for a Living” by Alexander Elder. This book was again cover market psychology, computerized technical analysis which explained well the function of those popular indicators plus risk management. I quite enjoying reading the market psychology part, because it did mention how our emotion influences by the price movement. However, when comes to computerized technical analysis part, I skip a lot because I know what indicator I want to use in my trading and I always believe simple is the best.

Why do most traders lose and wash out of the markets? Emotional and little trading knowledge are two reasons, but there is another. Markets are set up so that most traders must lose money and trading industry kills traders with slippage and commission. Slippage is the difference of the price that you willing to pay and the price you actually pay. When you eager to enter or exit the market by giving market order and it often tends to become the worst price when the order had been done. On the other hand, commission is the service charges given to the broker whenever a trader wants to enter or exit a trade. When you record down the commission for every transaction being made, you will found that your commission will be an upward sloping graph and never slope downward because your broker will never give back the commission even though lot of trading transaction was being made. Trading is a minus-sum game, in order to survive in long run, traders must cautious on the damage cause by slippage and commission. There is 1 of my friend who work as a future broker and he got 1 client which trade heavily with him. He told me this client was trading half year and losing around 150k and surprisingly this client was contribute 100k commission to my friend!!! In this case, if you don’t want to see your accumulated commission become so much as this client, always seek for broker that able to provide the cheapest commission as possible.

Trading is so exciting that it often make people feels high. Nobody can get high and make money at the same time. Greed and fear are enough to destroy a trader, so we have to use our intellect rather than gut to beat the market. Besides that, there are 2 very interesting question that being mention regarding probability. First, a group of people had given 2 choices to choose: a 75% chance to win $1000 with a 25% to get nothing or another choice; 100% get $700. In fact, most of the people will choose the second option including me even though the first choice leads to $750 gain over time. This test explained that most of the traders are make emotional decision and willing to take smaller gain just like what scalpers that aim for little profit from a trade as long the profit was guarantee. Another test is given: people have to choose between a sure loss $700 or a 75% chance of losing $1000 and a 25% of losing nothing. What an impressive probability test, I admit I choose the second option as majority people does rather than first one and tends to suffer extra $50 in the long run. Again, it shows I still an amateur trader who trying to avoid risk and end up maximizes losses. As a result, we have to aim for the trade that give higher probability to maximize wins and minimize losses, and don’t ever hang on hope and irrationally avoid accepting small losses.