Trading—The Last Frontier

You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody. This is the life of a successful trader.

Many aspire to it but few succeed. An amateur looks at a quote screen and sees millions of dollars sparkle in front of his face. He reaches for the money—and loses. He reaches again—and loses more. Traders lose because the game is hard, or out of ignorance, or from lack of discipline. If any of these ail you, I wrote this book for you.

How I Began to Trade

In the summer of 1976, I drove from New York to California. I took along a few books on psychiatry (I was a first-year psychiatric resident), several histories, and put a paperback copy of Engel’s How to Buy Stocks into the trunk of my old Dodge. Little did I know that a dog-eared paperback, borrowed from a lawyer friend, would in due time change the course of my life. That friend, incidentally, had a perfect reverse golden touch—any investment he touched went under water. But that’s another story.

I gulped down the Engel book in campgrounds across America, finishing it on a Pacific beach in La Jolla. I had known nothing about the stock market, and the idea of making money by thinking gripped me.

I grew up in the Soviet Union in the days when it was, in the words of a former U.S. president, “an evil empire.” I hated the Soviet system and wanted to get out, but emigration was forbidden. I entered college at 16, graduated medical school at 22, completed my residency, and then took a job as a ship’s doctor. Now I could break free! I jumped the Soviet ship in Abidjan, Ivory Coast.

I ran to the U.S. Embassy through the clogged dusty streets of an African port city, chased by my ex-crewmates. The embassy put me in a “safe house” and then on a plane to New York. I landed at Kennedy Airport in February 1974, arriving from Africa with $25 in my pocket. I spoke some English, but did not know a soul in this country.

I had no idea what stocks, bonds, futures, or options were and sometimes got a queasy feeling just from looking at the American dollar bills in my wallet. In the old country, a handful of them could buy you three years in Siberia.

Reading How to Buy Stocks opened a whole new world for me. When I returned to New York, I bought my first stock—it was KinderCare. A very bad thing happened—I made money on my first trade and then the second one, leaving me with a delusion that making money in the markets was easy. It took me a couple of years to get rid of that notion.

My professional career proceeded on a separate track. I completed a residency in psychiatry at a major university hospital, studied at the New York Psychoanalytic Institute, and served as book editor for the largest psychiatric newspaper in the United States. I still have my license, but my professional practice these days is at most an hour or two per month. I am busy trading, love traveling, and do some teaching.

Learning to trade has been a long journey—with soaring highs and aching lows. In moving forward—or in circles—I repeatedly knocked my head against the wall and ran my trading account into the ground. Each time I returned to a hospital job, put a stake together, read, thought, did more testing, and then started trading again.

My trading slowly improved, but the breakthrough came when I realized that the key to winning was inside my head and not inside a computer. Psychiatry gave me the insight into trading that I will share with you.

Do You Really Want to Succeed?

For many years I had a friend whose wife was fat. She was an elegant dresser, and she had been on a diet for as long as I had known her. She said she wanted to lose weight and she didn’t eat cake or potatoes in front of people—but when I came into her kitchen, I’d see her go at it with a big fork. She said she wanted to be slim, but remained fat.

The short-term pleasure of eating was stronger for her than the delayed pleasure and health benefits of weight loss. My friend’s wife reminded me of a great many traders who say they want to be successful but keep making impulsive trades—going for the short-term thrills of gambling in the markets.

People deceive and play games with themselves. Lying to others is bad, but lying to yourself is hopeless. Bookstores are full of good books on dieting, but the world is still full of overweight people.

And remember this: an athlete who wants to enjoy risky sports must follow safety rules. When you reduce risks, you gain an added sense of accomplishment and control. The same goes for trading.

You can succeed in trading only if you handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his capital as carefully as a professional scuba diver watches his air supply.

Psychology Is the Key

Remember how you felt the last time you placed an order? Were you anxious to jump in or afraid of losing? Did you procrastinate before entering your order? When you closed out a trade, did you feel elated or humiliated? The feelings of thousands of traders merge into huge psychological tides that move the markets.

Getting Off the Roller Coaster

The majority of traders spend most of their time looking for good trades. Once they enter a trade, they don’t manage it but either squirm from pain or grin from pleasure. They ride an emotional roller coaster and miss the essential element of winning—the management of their emotions. Their inability to manage themselves leads to poor risk management and losses.

If your mind is not in gear with the markets, or if you ignore changes in mass psychology of crowds, you have no chance of making money trading. All winning professionals know the enormous importance of psychology. Most losing amateurs ignore it.

Friends and students who know that I am a psychiatrist often ask whether this helps me as a trader. Good psychiatry and good trading have one important principle in common. Both focus on reality, on seeing the world the way it is. To live a healthy life, you have to live with your eyes open. To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on fantasies, regrets, and wishful thinking.

A Man’s Game?

Brokerage house records indicate that most traders are male. The files of my firm,, confirm that approximately 85 to 90 percent of traders are male. The percentage of women traders among my clients, however, has more than doubled since the original edition of Trading for a Living was written twenty years ago.

The English language being what it is, “he” flows better than “he or she” or jumping between the two pronouns. To make reading easier, I’ll use the masculine pronoun throughout this book. Of course, no disrespect is intended to the many women traders.

As a matter of fact, I find that the percentage of successful traders is higher among women. As a group, they tend to be more disciplined and less arrogant than men.

How This Book Is Organized

The three pillars of successful trading are psychology, market analysis, and risk management. Good record-keeping ties them together. This book will help you learn the essentials of all these areas.

Part One of this book will show you how to manage emotions in trading. I discovered this method while practicing psychiatry. It greatly improved my trading, and it can help you too.

Part Two will focus on crowd psychology of the markets. Mass behavior is more primitive than that of individuals. If you understand how crowds behave, you’ll be able to profit from their mood swings instead of being swept up in their emotional tides.

Part Three will show how chart patterns reflect crowd behavior. Classical technical analysis is applied social psychology, like poll-taking. Support, resistance, breakouts, and other patterns reflect crowd behavior.

Part Four will teach you modern methods of computerized technical analysis. Indicators provide a better insight into mass psychology than classical chart patterns. Trend-following indicators help identify market trends, while oscillators show when those trends are ready to reverse.

Volume and open interest also reflect crowd behavior. Part Five will focus on them as well as on the passage of time in the markets. Crowds have short attention spans, and a trader who relates price changes to time gains a competitive advantage.

Part Six will focus on the best tools for analyzing the stock market as a whole. They can be especially helpful for stock index futures and options traders. 

Part Seven will present several trading systems. We’ll begin with the Triple Screen, which has become widely accepted, and then review the Impulse and Channel trading systems.

Part Eight will discuss several classes of trading vehicles. It will outline pluses and minuses of equities, futures, options, and forex, while blowing away the promotional fog that clouds some of these markets.

Part Nine will lead you into the all-important topic of money management. This essential aspect of successful trading is neglected by most amateurs. You can have a brilliant trading system, but if your risk management is poor, then a short string of losses will destroy your account. Armed with the Iron Triangle of risk control and other tools, you’ll become a safer and more effective trader.

Part Ten will delve into the nitty-gritty of trading—setting stops, profit targets, and scanning. These practical details will help you implement any system you like.

Part Eleven will guide you through the principles and templates of good record-keeping. The quality of your records is the single best predictor of your success. I’ll offer you free downloads of the templates I like to use.

Last but not least, this book has a separate Study Guide. It asks over 100 questions, each linked to a specific section of the book. All questions are designed to test your level of understanding and discover any blind spots. After you finish reading each section of this book, it’ll make sense to turn to the Study Guide and answer questions relevant to that section. If test results turn out to be less than excellent, don’t hurry, reread that section of the book, and retake the test.

When you find ideas that look important to you, test them in the only way that matters—on your own market data and in your own trading. You will make this knowledge your own only by questioning and testing it.

The Odds against You

Why do most traders lose and wash out of the markets? Emotional and mindless trading are big reasons, but there is another. Markets are actually set up so that most traders must lose money. The trading industry slowly kills traders with commissions and slippage.

You pay commissions for entering and exiting trades. Slippage is the difference between the price at which you place your order and the price at which it gets filled. When you place a limit order, it is filled at your price or better, or not at all. When you feel eager to enter or exit and place a market order, it’s often filled at a worse price than prevailed when you placed it.

Most amateurs are unaware of the harm done by commissions and slippage, just as medieval peasants could not imagine that tiny invisible germs could kill them. If you ignore slippage and deal with a broker who charges high commissions, you’re acting like a peasant who drinks from a communal pool during a cholera epidemic.

The trading industry keeps draining huge amounts of money from the markets. Exchanges, regulators, brokers, and advisors live off the markets, while generations of traders keep washing out. Markets need a fresh supply of losers just as builders of the ancient pyramids needed a fresh supply of slaves. Losers bring money into the markets, which is necessary for the prosperity of the trading industry.

A Minus-Sum Game

Winners in a zero-sum game make as much as losers lose. If you and I bet $20 on the direction of the next 100-point move in the Dow, one of us will collect $20 and the other will lose $20. A single bet has a component of luck, but the more knowledgeable person will keep winning more often than losing over a period of time.

People buy the industry’s propaganda about trading being a zero-sum game, take the bait, and open accounts. They don’t realize that trading is a minus-sum game. Winners receive less than what losers lose because the industry drains money from the markets.

For example, roulette in a casino is a minus-sum game because the casino sweeps away between three and six percent of every bet. This makes roulette unwinnable in the long run. You and I can get into in a minus-sum game if we make the same $20 bet on the next 100-point move in the Dow through brokers. When we settle, the loser will be out $23, and the winner will collect only $17, while two brokers will smile on their way to the bank.

Commissions and slippage are to traders what death and taxes are to all of us. They take some fun out of life and ultimately bring it to an end. A trader must support his broker and the machinery of exchanges before he collects a dime. Being simply “better than average” is not good enough. You have to be head and shoulders above the crowd to win a minus-sum game.


Commissions have become much smaller in the past two decades. Twenty years ago, there were still brokers who charged one-way commissions of between half a percent and one percent of trade value. Buying a thousand shares of GE at $20 a share, with a total value of $20,000, would have set you back $100 to $200 on the way in—and again on the way out. Fortunately for traders, commission rates have plummeted.

The extortionate rates haven’t completely disappeared. While preparing this book for publication, I received an e-mail from a client in Greece with a small account whose broker—a major European bank—charged him a $40 minimum on any trade. I told him of my broker whose minimum for a hundred shares is only $1. Without proper care, even seemingly small numbers can raise a tall barrier to success.

Look at a fairly active trader with a $20,000 account, doing one roundtrip trade per day, four days a week. Paying $10 one way, by the end of the week he’ll spend $80 in commissions: $40 for entries and $40 for exits. If he does that 50 weeks per year (if he lasts that long), by the end of the year he will have spent $4,000 on commission. That would be 20% of his account!

George Soros, a top money manager, delivers an average 29% annual return. He wouldn’t be where he is if he paid 20% a year in commissions! Even a “small commission” can build up a major barrier to success! I’ve heard brokers chuckle as they gossiped about clients who beat their brains out just to stay even with the game.

Shop for the lowest possible commissions. Don’t be shy about bargaining for lower rates. I’ve heard many brokers complain about a shortage of customers—but not many customers complain about the shortage of brokers. Tell your broker it is in his best interest to charge you low commissions because you will survive and remain a client for a long time. Design a trading system that will trade less often.

In my own trading, I maintain one major account with a broker who charges me $7.99 for unlimited size trades and another with a broker who charges a penny a share, with a $1 minimum. When I trade expensive stocks, where I buy fewer than 800 shares, I give that order to the penny-a-share broker; otherwise, I go with the $7.99-per-trade broker. A beginning trader, making his first steps, should look for a penny-a-share broker. Then you can trade your 100 shares for a dollar. A futures trader can expect to pay just a couple of dollars for a roundtrip trade.


Slippage means having your orders filled at a different price than what you saw on the screen when you placed your order. It is like paying 50 cents for an apple in a grocery store even though the posted price is 49 cents. A penny is nothing—but if you’re buying a thousand apples or a thousand shares with a penny slippage, it’ll come to $10 per order, probably greater than your commission.

There are two main types of orders: market and limit. Your slippage depends on which of these types you use.

A limit order says—‘give me that apple at 49 cents.’ It guarantees the price, but doesn’t guarantee a fill. You’ll pay no more than 49 cents, but you may end up without the apple that you wanted.

A market order says—‘give me that apple.’ It guarantees a fill, but doesn’t guarantee the price. If prices of apples are rising when you place your order, you may well pay more than you saw on the screen when you pushed the buy button. You may get hit by slippage.

Slippage on market orders rises with market volatility. When the market begins to run, slippage goes through the roof. Do you have any idea how much slippage costs you?

There is only one way to find out: write down the price at the time you placed a market order, compare it with your fill, and multiply the difference by the number of shares or contracts. Needless to say, you need a good record-keeping system, such as a spreadsheet with columns for each of the above numbers. We offer such a spreadsheet to traders as a public service.

You’ll be reading “record this” and “record that” throughout this book. Remember that good record-keeping is essential for your success. You have to keep an eye on your wins and an even sharper eye on your losses because you can learn much more from them.

Here’s a shocking number, which you can confirm by keeping good records: an average trader spends three times more on slippage than on commissions.

Earlier we talked about commissions raising a barrier to success. The barrier from slippage is three times higher. This is why, no matter how tempting a trade, you need to avoid buying “at the market.”

You want to be in control and trade only at prices that suit you. There are thousands of stocks and dozens of futures contracts. If you miss a trade due to a limit order, there’ll be countless other opportunities. Do not overpay! I almost always use limit orders and resort to market orders only when placing stops. When a stop level gets hit, it becomes a market order. When a trade is flaming out, it’s not the time to economize. Get in slow but get out fast.

To reduce slippage, trade liquid, high-volume markets and avoid thinly traded stocks, where slippage tends to be higher. Go long or short when the market is quiet, and use limit orders to buy or sell at specified prices. Keep a record of prices at the time you placed your order. Demand your broker fight the floor for a better fill when necessary.

Bid-Ask Spreads

Whenever the market is open, there are always two prices for any trading vehicle—a bid and an ask. A bid is what people are offering to pay for that security at that moment; an ask is what sellers are demanding in order to sell it. A bid is always lower, an ask higher, and the spread between them keeps changing.

Bid-ask spreads vary between different markets and even in the same market at different times. Bid-ask spreads are higher in thinly traded vehicles, as the pros who dominate such markets demand high fees from those who want to join their party. The bid-ask spreads are likely to be razor-thin, perhaps only one tick on a quiet day in an actively traded stock, future or option. They grow wider as prices accelerate on the way up or down and may become huge—dozens of ticks—after a severe drop or a very sharp rally.

Market orders get filled at the bad side of bid-ask spreads. A market order buys at the ask (high) and sells at the bid (low). Little wonder that many professional traders make a good living from filling market orders. Don’t feed the wolves—use limit orders whenever possible!

The Barriers to Success

Slippage and commissions make trading similar to swimming in a piranha-infested river. Other expenses also drain traders’ money. The cost of computers and data, fees for advisory services and books—including the one you are reading now—all come out of your trading funds.

Look for a broker with the cheapest commissions and watch him like a hawk. Design a trading system that gives signals relatively infrequently and allows you to enter markets during quiet times. Use limit orders almost exclusively—except when placing stops. Be careful on what tools you spend money: there are no magic solutions. Success cannot be bought, only earned.


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