ZF Capital

When a beginner puts on a trade too big for his account, and it starts to swing, it floods him with adrenaline. A upswing gives him enough money to dream about moving to easy street. Feeling elated, he misses the signals of a top and gets caught in a downside reversal. A downswing puts him into such a state of fear that he misses the signals of a bottom and sells out right near the lows. Beginners pay more attention to their emotions than to the reality of the markets.

– Alexander Elder, Come Into My Trading Room: A Complete Guide to Trading

When I ask traders at a seminar, “What is price?” some answer, “Price is perceived value.” Others say, “Price is what a person at one particular point in time is willing to pay another person for a commodity.” Someone says, “Price is what the last person paid for it. That’s the price right now.” Another suggests, “No, it’s what the next person will pay.”

Traders who cannot give a clear definition of price do not know what they are analyzing. Your success or failure as a trader depends on handling prices — and you had better know what they mean!

– Alexander Elder, Trading For A Living

Raise your eyes from the keyboard and think about two goals– to learn to trade and to make money. Which comes first and which comes second? Stop killing yourself trying to make a lot of money in a hurry. Learn to trade, and the money will follow. An intelligent horse trainer does not overload a young horse. Training comes first, pulling heavy loads comes later.

– Alexander Elder, Come Into My Trading Room

When a monkey hurts its foot on a tree stump, he flies into a rage and kicks the piece of wood. You laugh at a monkey, but do you laugh at yourself when you act like him? If the market drops while you are long, you may double up on your losing trade or else go short, trying to get even. You act emotionally instead of using your intellect. What is the difference between a trader trying to get back at the market and a monkey kicking a tree stump? Acting out of anger, fear, or elation destroys your chance of success. You have to analyze your behavior in the market instead of acting out your feelings.

We get angry at the market, we become afraid of it, we develop silly superstitutions. All the while, the market keeps cycling through its rallies and declines like an ocean going through its storms and calm periods.

– Alexander Elder, Trading for a Living

Most fields of human endeavor have rules, yardsticks and professional bodies to enforce discipline. No matter how independent you feel, there is always some agency looking over your shoulder. If a doctor in private practice starts writing too many prescriptions for pain killers, he’ll soon hear from the health department.

Markets impose no restrictions, as long as you have enough equity. Adding to losing positions is similar to overprescribing narcotics, but nobody will stop you. As a matter of fact. other market participants want you to be undisciplined and impulsive. That makes it easier for them to get your money. Your defense against self-destructiveness is discipline. You have to set up your own rules and follow them in order to prevent self-sabotage.

Discipline means designing, testing, and following your system. It means learning to enter and exit in response to predefined signals rather than jumping in and out on a whim. It means doing the right thing, not the easy thing.

– Alexander Elder, Come Into My Trading Room

Traders often ask me how much money they need to begin trading. They want to be able to withstand a drawdown, a temporary drop in the account equity. They expect to lose a large amount of money before making any! They sound like an engineer who plans to build several bridges that collapse before erecting his masterpiece. Would a surgeon plan on killing several patients while becoming an expert at taking out an appendix?

– Alexander Elder, Trading for a Living

I saw the best example of how money can twist a player’s mind while teaching my oldest daughter to play backgammon. She was about eight at the time but very determined and bright. After a few months of practice she began beating me. Then I suggested we play for money– a penny a point, which in our scoring meant a maximum of 32 cents per game. She kept beating me, and I kept raising the stakes. By the time we reached 10 cents a point she started losing and soon gave back every last penny.

Why could she beat me playing for little or no money but lost when the stakes increased? Because for me $3.20 was pocket change, but for the kid it was real money. Thinking about it made her a little more tense and she played slightly below her peak level– enough to fall behind. A trader with a small account is so preoccupied with money that it impairs his ability to think, play, and win.

– Alexander Elder, Come Into My Trading Room: A Complete Guide to Trading