During the holiday season, I find that there is always time to sit down for a few hours and enjoy a good book. The book that I read over the holidays was on the topic of stock trading called: “Come into my Trading Room” by Alexander Elder. The author and the book was recommended by the professional full time trader from The Kirk Report. Dr. Alexander Elder is a psychology professor and has been a professional trader for the past 20 years. It took him 3 years to complete and publish the book which is evident in the amount of detail he includes.
He has 3 main concepts in the book which include how to read technical indicators, how to manage your money, and how to stay organized as a trader. All 3 concepts act like a tripod for a successful trader, without one leg, the system will topple. For me, I already understood the indicators, but the money management and organization section really opened my eyes. If you are interested in learning about technical indicators, do some reading at StockCharts.com. Pay particular attention to MACD and Oscillators and the positive/negative divergence signals associated with them. Positive(bullish) and negative(bearish) divergence signals are among the most powerful in technical stock trading.
In the money management section, Dr. Elder teaches over and over how important it is to protect your capital while trading by setting stops and limiting exposure. So he created the 2% and 6% rule. The 2% rule states that you should never risk anymore than 2% of your total capital on any one trade. The 6% rule states that you should not lose anymore than 6% of your total capital in any month, or else you stop trading for the rest of the month. To give an example of the 2% rule, say you have $20k capital to trade, and you’re eyeing a $10 stock with a $9 stop loss limit. With the 2% rule, you allowed to risk up to $400 of your capital on this trade which means you can purchase up to 400 shares ($400/$1 stop loss per share). He indicates that 2% is the upper limit, personally, I don’t feel comfortable risking anymore than 1% of my capital. But perhaps as my results improve, i’ll gradually work up to the 2% limit.
The stock trader organization section was really helpful as it explained how and why a successful stock trader tracks his results. He includes examples of how his spreadsheets look with separate sheets tracking his trades, potential trades and his equity curve (monthly trading account balance). I have already started to implement some of his organizational methods.
The cost of the book is around $50 + taxes (CAD) new at Amazon.ca and worth every penny if you’re interested in stock trading. If you don’t want to fork over the cash, perhaps you can find a copy in your local library.