Study Guide for The New Trading for a Living by Alexander Elder – Ebook | Scribd
Experienced traders seem to glide through the markets, swinging into and out of trades. Their trading appears effortless, like downhill skiing on TV. The illusion of ease vanishes when you clamp on a pair of skis and discover the bumps on the slope. If you want to improve your trading skills, you have to work, study, and do your homework.
I created this Study Guide to help you grow and succeed as a trader. It is based on my years of experience as a trader and teacher of traders. The more you study the markets and your reactions to them, the more likely you are to succeed. You need to learn more about yourself as well as the markets—good traders always learn.
Each question in this Guide is linked to a specific chapter in The New Trading for a Living—psychology, risk management, indicators, and so on. Write down your answers and compare them with those in the book. When answering chart-related questions, cover each chart with a sheet of paper and move it slowly from left to right to imitate the unfolding of market action. Practice dealing with the uncertainty of the markets while working with this Guide.
This Guide asks questions and provides answers—but reasonable people may disagree with some of them. Trading is partly a science and partly an art—partly objective and partly subjective. Let this Guide challenge you to think deeper about the markets and your reactions to them.
I am grateful to Henry Abelman and Jeff Parker, both repeat winners of Spike Trade’s Eagle Eye award, for reviewing all questions and answers. Carol Keegan Kayne did the final check for clarity and precision.
Thanks to my former professors and students at the universities in Estonia and the United States for providing many opportunities to teach and develop my educational style.Thanks to the members of SpikeTrade.com, who keep sending me trading-related questions. Posting answers to them week after week keeps me on my toes.
I hope this Guide helps you to sharpen your skills and to become a better, more confident trader.
Dr. Alexander Elder
NewYork—Vermont, 2014
QUESTIONS
AND
RATING SCALES
Introduction
To win in trading, you must outperform masses of competitors. The majority must lose in order to pay those who win. To become a successful trader, you must beat the odds against you. You must learn to think and act differently from the market crowd.
The New Trading for a Living contains several unorthodox trading ideas. The aim of this Introduction is to pause at the beginning of the journey and to see whether you are in tune with some of the unconventional thinking about trading.
Question 0-1
Which of the following methods of making trading decisions can serve traders well in the long run?
Fundamental analysis
Inside information
Hunches and tips
Technical analysis
I and II
II and III
I and IV
III and IV
Question 0-2
Which of the following isn’t needed for trading success?
Trading psychology
Analytic method
Connections with market insiders
Money management method
Question 0-3
The best approach to reading a book on trading is to
test all the ideas that interest you on your own market data.
incorporate all the ideas in your work.
not trust what you read—why would anyone share good trading ideas?
ask other traders whether the ideas in the book worked for them.
Question 0-4
Which of the following is not a major cause of trading losses?
Slippage
Commissions
Emotional trading
Theft
Question 0-5
Trader Jim and Trader John take the opposite sides of a trade. Both pay commissions, and both get hit with slippage. Trader Jim, the winner, collects $920, while Trader John, the loser, is out $1080. The result of this trade illustrates the fact that trading is a:
Zero-sum game
Positive expectations game
Random Walk
Minus-sum game
Question 0-6
You find a stock trading at $20 and plan to buy 100 shares. Your broker will charge a commission of $ 10. Which of the following statements is incorrect?
When dealing with thousands of dollars, don’t quibble about $ 10.
You need to make 1% profit to avoid losing money on this trade.
Using 50% margin, you need to make more than 2% profit to avoid losing money on this trade.
Question 0-7
You place a market order to buy 100 shares of a rising stock that currently trades at $20. Your order gets filled at $20.08. Your slippage on the trade is
80 cents
$8
$16
$80
Question 0-8
The stock you bought in Question 7 rallied to $22. You expect the rally to continue but raise your stop to $21 to protect half of your paper profit. The stock sinks and hits your stop—you get filled at $20.88. Your slippage on this trade represents what percentage of your gross profit?
5 percent
10 percent
25 percent
50 percent
Question 0-9
In the trade described in Questions 7 and 8, the trading industry took what percentage of your gross gain?
25 percent
50 percent
75 percent
100 percent
Individual Psychology
Your greatest danger in trading comes from the person holding this book—you. Our emotions often tip the scale between winning and losing. If you can stay cool and make rational decisions, trading profits will follow.
A professional trader is calm and collected. He knows what he’ll do if the market goes up, down, or sideways. On days when he is not sure, he stays out, patiently monitoring the market from the sidelines. A pro feels in control.
If you feel giddy with joy when the market goes your way but freeze in fear when it swings against you, your actions will be emotional and your account will suffer. When the mind becomes clouded by greed or fear, even the best trading systems fly out the window. The questions that follow are designed to help you focus on trading psychology.
Question 1-1
A successful trader’s attitude toward risk is usually one of
avoiding risk.
thriving on risk.
enjoying risky situations, even though losses hurt.
measuring each risk.
Question 1-2
The goal of a successful trader is to
become the best trader he can.
make more money than other traders.
buy things that will set him above other traders.
win respect of family and friends.
Question 1-3
A trader on a losing streak has lost 20 percent of his account. He would best be advised to
subscribe to a newsletter with a verified track record.
purchase a trading system with a history of profitability and low drawdowns.
stop trading until he has analyzed his losing trades and determined their causes.
continue to trade because the laws of probability indicate a likely turn in his favor.
Question 1-4
Having a large trading account is desirable for all of the following reasons except that
you can afford to lose more.
you can diversify among more markets.
you can trade different systems.
your expenses represent a smaller percentage of your account.
Question 1-5
Which two of the following statements about commercially sold trading systems are most accurate?
A track record provides confidence that a system will continue to perform well.
The fact that a system is sold by a prominent trader provides an extra margin of confidence.
Trading systems are designed to fit old data, and they self-destruct when markets change.
You can buy a system from a top analyst and lose money using it.
I and II
I and III
II and III
III and IV
Question 1-6
Which of the following is a key sign of a gambling attitude toward trading?
The inability to resist the urge to trade
Feeling elated when trades go well and ashamed after losing
Always reversing losing positions
A string of trading losses
I only
I and II
I, II, and III
I, II, III, and IV
Question 1-7
Within a year, all of the following occur in the life of a trader: he receives three traffic tickets, pays a penalty for filing his taxes late, gets two reprimands for tardiness on his non-trading job, and his trading account is down 35
