When I first picked up Come Into My Trading Room by Dr. Alexander Elder, I was eager to unravel the complexities of trading, and this book delivered beyond my expectations. It’s not just a manual for trading; it’s a journey of self-discovery and disciplined practice. Dr. Elder doesn’t sugarcoat the challenges—he lays bare the realities of the market, where survival demands sharp psychological discipline, robust money management, and methodical strategies. As I read, I was struck by how practical and relatable his insights were, from learning the nuances of technical analysis to embracing the mindset of an organized, disciplined trader. This book isn’t just about how to trade; it’s about how to trade smartly, strategically, and sustainably. Through Dr. Elder’s guidance, I’ve come to understand that the journey to becoming a successful trader is as much about mastering myself as it is about mastering the markets.
Come Into My Trading Room by Dr. Alexander Elder
PART ONE FINANCIAL TRADING FOR BABES IN THE WOODS
Chapter 1: Invest? Trade? Gamble?
This chapter defines the three primary market activities and explores their characteristics and pitfalls:
- Investing:
- Involves long-term strategies based on recognizing economic and societal trends.
- Requires patience and the ability to hold positions through market fluctuations.
- Success relies on identifying opportunities early and maintaining confidence in predictions.
- Example: Warren Buffett’s strategic investments.
- Trading:
- Focuses on short-term price swings, aiming to buy low and sell high (or vice versa for shorting).
- Success demands mastery of three skills:
- Psychology: Discipline and emotional control during volatile markets.
- Market Analysis: Using technical indicators to identify trends.
- Money Management: Managing risk and account size effectively.
- Two approaches:
- Momentum trading (riding trends).
- Countertrend trading (betting on reversals).
- Gambling:
- Typically driven by impulsiveness, entertainment, or greed, often leading to financial loss.
- Professionals treat gambling as a calculated job, while amateurs often lose due to lack of discipline.
- Markets are prone to emotional behaviors that create inefficiencies, which disciplined traders can exploit.
Action Steps
- Self-Assessment:
- Decide whether you are an investor, trader, or gambler based on your goals, skills, and risk tolerance.
- Learn Trading Psychology:
- Develop rules to manage emotions and remain calm during market movements.
- Master Techniques:
- Understand momentum and countertrend strategies, and practice with simulations.
- Avoid Emotional Decisions:
- Stick to pre-determined entry and exit points.
Chapter 2: What Markets to Trade?
This chapter evaluates stocks, futures, and options as trading vehicles and emphasizes choosing markets based on liquidity and volatility.
- Stocks:
- Represent ownership in companies and are influenced by fundamentals and sentiment.
- Suitable for beginners due to slower price movements compared to other markets.
- Utilize technical analysis to confirm trends and avoid buying into declining stocks.
- Futures:
- Contracts for the future delivery of goods or financial instruments.
- Offer high leverage, leading to higher profit potential but also significant risk.
- Require robust money management skills due to volatility and margin requirements.
- Options:
- Financial instruments with high complexity and speculative nature.
- Involve predicting the right asset, direction, and timing.
- Highly risky for beginners; professionals often write (sell) options rather than buy them.
- Key Considerations:
- Liquidity: High volume markets allow easier entry/exit.
- Volatility: Movement in prices creates trading opportunities.
Action Steps
- Choose Your Market:
- Begin with stocks if you’re a beginner. Move to futures or options after gaining significant experience.
- Focus on Liquidity:
- Select assets with high daily trading volumes.
- Research Strategies:
- Learn about technical analysis to identify trends and manage risks.
- Avoid Overleverage:
- Use conservative position sizes to withstand market fluctuations.
Chapter 3: The First Steps
The chapter introduces the practical and psychological challenges of trading and the preparation needed to succeed.
- Psychological Readiness:
- Understand that markets are designed to separate traders from their money.
- Success requires emotional control, a calm mindset, and discipline.
- Barriers to Success:
- Transaction Costs: High commissions, slippage, and fees can erode profits.
- Lack of Capital: Small accounts are vulnerable to losing streaks and market noise.
- Overconfidence in Tools: Expensive tools or systems cannot substitute for proper trading skills.
- Practical Preparations:
- Use a realistic account size to manage risk.
- Choose cost-effective brokers with transparent fees.
- Maintain detailed records for analysis and learning.
Action Steps
- Build Psychological Discipline:
- Practice with simulations or paper trading to develop a calm trading approach.
- Minimize Costs:
- Opt for discount brokers and use limit orders to avoid unnecessary slippage.
- Start with Adequate Capital:
- Ensure your account size can withstand multiple losses without wiping out.
- Invest in Affordable Tools:
- Choose tools and educational materials that align with your budget.
- Keep Detailed Records:
- Track every trade, noting the rationale, outcomes, and lessons learned.
PART TWO THE THREE M’S OF SUCCESSFUL TRADING
Chapter 4: Mind—The Disciplined Trader
This chapter emphasizes that successful trading requires discipline, mental readiness, and psychological self-awareness. Markets exploit psychological flaws like fear, greed, and impulsiveness, which can lead traders to poor decisions. Key elements include:
- Self-Discovery: Trading exposes psychological weaknesses such as greed, fear, and overconfidence.
- Discipline: Essential for sticking to strategies and avoiding emotional decision-making. Traders must enforce personal rules since the market lacks external control.
- Responsibility: Successful traders accept full accountability for their results and focus on refining methods rather than blaming others.
- Record-Keeping: Detailed records, including trade analysis and emotional states, are vital for learning from mistakes and improving performance.
Action Steps
- Analyze Psychological Barriers:
- Identify personal triggers for fear, greed, or impulsiveness.
- Develop strategies to counteract these tendencies.
- Establish Rules:
- Create strict guidelines for trade entries, exits, and stop-losses.
- Commit to following these rules regardless of market excitement.
- Maintain a Trade Journal:
- Document the rationale for each trade, outcomes, and emotions involved.
- Review regularly to spot recurring mistakes.
- Focus on Self-Improvement:
- Accept full responsibility for losses and adjust strategies accordingly.
Chapter 5: Method—Technical Analysis
This chapter introduces technical analysis as a critical method for interpreting market behavior. Key points include:
- Market Psychology: Charts and indicators reflect crowd behavior, offering insights into potential price movements.
- Indicators: Tools like moving averages, MACD, and Force Index reveal trends and the balance of power between bulls and bears.
- Simplicity: Successful traders focus on a few reliable tools rather than overwhelming themselves with too many indicators.
- Testing: Each method must be tested on historical data to ensure its reliability under different market conditions.
Action Steps
- Learn Core Indicators:
- Start with basic tools like moving averages, MACD, and volume analysis.
- Understand how each tool reflects market behavior.
- Specialize:
- Choose a niche market (e.g., stocks or futures) and refine techniques specific to that market.
- Test Your Tools:
- Apply methods to historical data to evaluate their effectiveness.
- Develop a System:
- Combine complementary indicators to build a cohesive trading strategy.
Chapter 6: Trading
This chapter focuses on the practical aspects of trading, including execution, risk management, and decision-making under pressure. Key highlights:
- Risk Management: Limiting losses is vital for long-term success. Tools like stop-loss orders and position sizing protect against large losses.
- Execution: Each trade is a bet on a price change. Traders must act decisively and avoid hesitation.
- Emotion Management: Overcoming excitement and fear ensures rational decision-making.
- Market Efficiency: Opportunities arise during periods of inefficiency, often driven by crowd emotions.
Action Steps
- Create a Risk Plan:
- Define maximum acceptable losses per trade and per account.
- Use stop-loss orders consistently to cap potential losses.
- Prepare for Scenarios:
- Simulate market situations (e.g., sudden price jumps) to develop automatic responses.
- Act Decisively:
- Avoid overthinking during trades; trust in pre-established strategies.
- Analyze Market Behavior:
- Look for inefficiencies caused by emotional crowd reactions and act cautiously.
Chapter 7: Money Management Formulas
This chapter highlights the critical role of money management in trading. Key elements include:
- Purpose of Money Management:
- Ensures survival, steady growth, and occasional significant gains.
- Reduces risk on losing trades and maximizes profits on winning trades.
- Rules for Risk Management:
- 2% Rule: Risk no more than 2% of your total equity on a single trade to safeguard against large losses.
- 6% Rule: Cumulative monthly losses should not exceed 6% of equity; if reached, halt trading for the rest of the month.
- Position Sizing:
- Calculate the number of shares or contracts to trade based on risk per share and equity.
- Progress cautiously by increasing trade sizes only after consistent profitability.
- Equity Management:
- Understand the concept of “optimal f” to balance risk and potential returns.
Action Steps
- Apply the 2% and 6% Rules:
- Measure equity monthly and ensure trades adhere to these guidelines.
- Track Your Equity Curve:
- Maintain records to assess risk and performance over time.
- Size Trades Conservatively:
- Start small and scale up based on consistent success.
- Analyze Losses:
- Identify patterns in losses and adjust strategies to minimize recurrence.
PART THREE COME INTO MY TRADING ROOM
Chapter 8: The Organized Trader
This chapter stresses the importance of discipline and record-keeping as foundational habits for traders.
- Traits of Successful Traders:
- Discipline is more crucial than intelligence or education.
- Good records provide insights into performance and learning opportunities.
- Trading Records:
- Maintain spreadsheets, equity charts, and trade diaries.
- Review past trades to refine strategies and avoid repeating mistakes.
- Planning and Preparation:
- Analyze markets during quiet periods, like evenings.
- Write down decisions to eliminate errors during execution.
Action Steps
- Keep Comprehensive Records:
- Use a spreadsheet to track trades and document key decisions in a diary.
- Set Daily Goals:
- Write actionable plans for trading each day, including entry and exit points.
- Schedule Review Sessions:
- Regularly revisit records to analyze performance and improve.
- Use Written Orders:
- Minimize errors by documenting orders before placing them.
Chapter 9: Trading for a Living
This chapter explores the journey from beginner to professional trader, emphasizing learning, patience, and risk management.
- Stages of Development:
- Beginner: Focus on learning while keeping annual losses under 10%.
- Intermediate: Target consistent profits and an annual return of 20%.
- Expert: Achieve financial independence and trade for enjoyment.
- Time Management:
- Dedicate ample time to study, trade, and analyze markets.
- Understand trading success builds incrementally over years.
- Keys to Success:
- Follow money management rules strictly.
- Avoid rushing to make money; prioritize learning and skill development.
Action Steps
- Focus on Learning:
- Start with small trades to gain experience without significant losses.
- Measure Performance:
- Set realistic benchmarks like beating riskless investments (e.g., Treasury bills).
- Allocate Time:
- Dedicate consistent hours to studying and trading.
- Plan for Growth:
- Progress from beginner to expert with disciplined efforts.
Chapter 10: Come Into My Trading Room
This chapter consolidates lessons learned and demonstrates practical application through trade examples.
- Triple Screen Trading System:
- Combines long-term strategic decisions with short-term tactical execution.
- Importance of Journaling:
- Documenting trades enhances learning and refines decision-making.
- Avoid sharing open trades to prevent emotional influence.
- Professional Approach:
- Maintain detailed charts and notes on trades, focusing on key signals and outcomes.
Action Steps
- Adopt Triple Screen System:
- Use multiple timeframes for strategy and execution.
- Create a Trade Journal:
- Record every trade with rationale, signals, and outcomes.
- Refine Continuously:
- Review journal entries regularly to identify patterns and improve.
- Stay Private:
- Share only closed trades to maintain objectivity in future decisions.
Why You Should Read Come Into My Trading Room
If you’re serious about trading and ready to approach it with the discipline and dedication it deserves, Come Into My Trading Room by Dr. Alexander Elder is a must-read. This book is more than a guide; it’s a comprehensive roadmap to becoming a skilled, confident, and profitable trader. Dr. Elder blends technical expertise with psychological insights, helping you not only understand the mechanics of trading but also master the mindset required to succeed. Whether you’re a beginner looking to build a solid foundation or an experienced trader aiming to refine your strategies, this book provides actionable advice, proven systems, and tools to navigate the complexities of the market. By the time you turn the final page, you’ll have a deeper understanding of trading as a profession and the confidence to take control of your financial future. Don’t just trade—trade intelligently and sustainably. This book will show you how.
This post is part of Making Money in the Stock Market, where you can read about the overview of strategies in investment and short term trading.