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Trading Book Reviews

Book Review: The Global Economic System

[easyazon-link asin=”0137050127″][/easyazon-link]The first thing I think needs to be said about [easyazon-link asin=”0137050127″]The Global Economic System[/easyazon-link] is that the title by itself isn’t a very good one. The book isn’t really about the global economic system. Now the subtitle, which is “How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises” does an excellent job of getting to the crux of what the book’s about. It very much focuses on how negative shifts in liquidity can produce cascading effects through the financial system and beyond into the economy.

From the perspective of traders and investors, I think the first part of the book in particular is extremely valuable. That’s where the author’s discuss the dynamics of the bid/ask spread – where it comes from on the base level and what causes it to expand and contract and move. The bid/ask idea is one that trips up a lot of folks in the exchange-traded markets, because they tend to see traded prices as the primary piece of information (this is something I wrote about in Misunderstanding the Bid/Ask Spread in Stock Trading, which is among the most commonly read posts on this site). The language the author’s use may be a bit challenging at times (two of the authors are university professors), but visuals are included to make the point about what can happen when liquidity in the market shifts.

The other really interesting thing (at least I thought so) from the early part of the book is a look at the liquidity risk premium. The authors model a portfolio that is basically long liquidity risk (meaning long low liquidity bonds and short high liquidity ones) and demonstrate the returns that can accrue, as well as the impact of market liquidity shocks.

The bid/ask and liquidity risk discussions sets up the rest of the book in terms of laying the market dynamics foundation for the bigger picture ideas it focuses on from that point forward. What the authors do from there is to put forward what they view to be the stages of a liquidity shock, from trigger all the way through to eventual transmission from Wall Street to Main Street.

Three examples of this liquidity shock progression are included. The first is the Great Depression. Second is the Japanese “Lost Decade”. Naturally, the so-called “Great Recession” we’ve just gone through is the third. The authors walk through the triggers and stages of these periods in a very detailed fashion with loads of market and economic data (lots of charts and graphs) to highlight there points. It’s well done.

In general terms, [easyazon-link asin=”0137050127″]The Global Economic System[/easyazon-link] is a book more likely to be of use to fundamentally oriented traders and investors since it tends to focus on bigger macro level events and effects. I do think, however, the early discussion on the big/ask spread and market liquidity is of use to all kinds of market participants. For those who really want to get into the liquidity risk research, an article by one of the authors which clearly was foundational to the book can be found here.

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Trading Book Reviews

Book Review: Trend Commandments

[easyazon-link asin=”0132695243″][/easyazon-link]I’ll admit to not being 100% sure how to describe [easyazon-link asin=”0132695243″]Trend Commandments[/easyazon-link] by Michael Covel. I’ll give it my best shot, though.

First of all, I’ll say it’s a pretty fast, easy read. The book is structured in a kind of series of articles or essays fashion. There are lots of them, and each “chapter” is only a couple pages. I read them straight through from front to back, but I see no reason why they couldn’t be read out of order if desired. The page count is about 240 in the print version I have, but it reads much more quickly than that because of its structure.

Like Covel’s earlier book, Trend Following, this is an unabashed endorsement of the trend trading approach. I’ve described that former book as being like a philosophy text which includes the discussion of the subject matter by numerous practitioners. Trend Commandments is also very philosophy oriented, though focuses pretty exclusively on the author’s own views on the subject, views informed by years interacting with the sorts of practitioners featured in the first book.

This is not a practical manual.

That needs to be made very clear. Covel does not describe trend following systems. You won’t find advice on indicators or methods for identifying trends. He does speak on the subjects of risk management, as well as market diversification. In the latter case there is a specific listing of markets that could/should be included in a trend trading strategy. The risk discussion is only really in terms of generalities.

So the bottom line is that if you’re looking for a book that lays out one or more trading systems you’ll want to look elsewhere. This book won’t fulfill that requirement (Covel’s The Complete Turtle is better in that regard, but I’d actually recommend Way of the Turtle as a more practical trend trading manual). If, however, you’d like to understand the mentality which underlies the trend following approach to trading, this is definitely a book worth reading (I’m planning on doing some future blog posts related to ideas brought up in the book). Just be prepared for a very unapologetic criticism of other approaches and mindsets found in the markets and media.

By the way, the “commandments” only really come in at the very end of the book in the form of a long (definitely not just ten) list of quotes from noted traders.

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Trading Book Reviews

Book Review: Investing with Volume Analysis

[easyazon-link asin=”0137085508″][/easyazon-link]If you want to learn just about everything there is to know about incorporating volume in your trading or investing you’re going to want to pick up a copy of [easyazon-link asin=”0137085508″]Investing with Volume Analysis[/easyazon-link] by Buff Dormeier. The author is a Chartered Market Technician (CMT) and an experienced money manager and he’s pulled together for this book a very comprehensive collection of volume studies and indicators, including some of his own devising.

This isn’t just some encyclopedia of volume analysis tools, though. There is considerable discussion of how to implement them, including studies demonstrating their performance. The author also discusses recent developments (high frequency trading, etc.) in the markets and their impact on volume and the analysis thereof.

My one issue with the book is that it has the feel of a manifesto, especially early on, and there are some religious undertones which may bother some readers. Most of that stuff is in the first few chapters which provide some background and historical perspective of volume and technical analysis. At times I found the reading slow going through that section, though it gets easier later.

All in all, I found this a very useful book. If you are looking to use volume in your trading/investing and market analysis, this is definitely the book for you.

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Trading Book Reviews

Book Review: Trade the Trader

[easyazon-link asin=”0137067089″][/easyazon-link]Going through [easyazon-link asin=”0137067089″]Trade the Trader[/easyazon-link] by Quint Tatro I couldn’t help but think the author must have read my own book, or at least has been following my blogging over the years. So much of the advice Tatro offers up is exactly the sort of stuff I’ve been talking about and writing about for the last several years. I couldn’t help but chuckle at times at how the author was saying things in a very similar fashion to how I would have done. 🙂

The basic philosophy underlying Trade the Trader is that applying basic technical analysis methods is no longer sufficient. The author suggests that traders need to take a second level view of things and learn to anticipate what those traders using basic methods will be doing in the market and positioning accordingly to take advantage. This bit of philosophy is definitely interesting and worthwhile of itself, but the book doesn’t actually spend all that much time on that subject.

This is not to suggest the book isn’t a good and useful one, just that the title probably doesn’t best reflect its contents.

So what does the book focus on, if not trading the trader? Well, just about everything else, actually.

Tatro covers just about all the high points in individual trading. He has chapters discussing time frames, entry and exit rules, risk management, trading plans, and trader psychology. Mostly it focuses on things in terms of his own particular style, which is largely basic chart and trend oriented (no indicators). There are numerous examples and stories scattered through the text to help reinforce the points he’s making. This is a stock trading oriented discussion, but most of it can be applied to other markets as well, so non-stock traders should not be dissuaded.

My one little gripe with the book is that the author could have used more sectioning in the text, and maybe the latter part of the book could have been structured differently, but it’s a minor thing. The chapters are fairly short, making the book convenient to read in small chunks, as I was doing during my daily commute. Also, the author’s writing style is pleasant and easy to follow. At just about 200 pages, it’s also not particularly long to begin with. Overall, I found it a good read and would consider it well worth going through for developing traders.

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Trading Book Reviews

Book Review: Nerds on Wall Street

[easyazon-link asin=”0471369462″][/easyazon-link]I finally finished reading [easyazon-link asin=”0471369462″]Nerds on Wall Street[/easyazon-link]by David J. Leinweber the other day. It’s a book I actually started reading nearly a year ago when I was preparing for my visit to the ICMA Centre at the University of Reading to talk to some of the faculty there about the PhD program. I figured it wouldn’t hurt to bone up on some of the history of high quantitative methods employed by Wall Street since that was what I was about to be talking about. I didn’t end up getting overly far in the book because of other things coming up, and have been reading it slowly, in fits and starts since then. Not that this should be taken to indicate the quality of the book. It’s just not the type of thing I normally pick up when I’m looking to kick back and relax.

Nerds on Wall Street largely comprises of a collection of articles the author has published over the years, though I personally didn’t feel like I was reading a bunch of separate items. Leinweber did a pretty good job smoothing out the transitions. The result is a pretty expansive look at the history of computerized methods applied in the financial markets, the author having been involved in quite a bit of it himself. It covers subjects from fairly simple methods just about any trader or investor can use today (many of which are relatively recent developments) to highly complex systems employed primarily by institutional level operators.

For traders looking for something that goes beyond a history lesson, there are a couple of sections I really think have a lot of value. One is the chapter on data mining which does a good job of highlighting the pitfalls of trading system back-testing. Another is the chapter on stock market manipulation across the years, which ties in with a chapter on collective intelligence, social media, etc.

My one disappointment with the book is toward the end where the author starts talking about ideas for resolving the banking crisis (the book was published in 2009)  because it’s dated at this point (which comes after a rant about how financial engineering was taken to a ridiculous extreme). One can also question the last chapter which talks about how the brain power so recently applied to coming up with complex financial engineering could be shifted to the energy sector, though it does make some interesting points. All in all, though, I found the book a very interesting and potentially valuable read.

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Trading Book Reviews

Book Review: Trading on Corporate Earnings News

[easyazon-link asin=”0137084927″][/easyazon-link]If you’re a stock market trader I think you’ll want to pick up a copy of [easyazon-link asin=”0137084927″]Trading on Corporate Earnings News[/easyazon-link] by John Shon and Ping Zhou. It’s a book that’s focused on short-term options trading, but which could have a fair bit of value to non-options traders and general market watchers as a whole. The authors are a pair of PhDs (Shon is an academic, Zhou a portfolio manager) who really get into the numbers about what stocks do around earnings announcements. It’s interesting and potentially quite useful stuff if you track stocks at all.

Don’t worry about the PhD thing, though. This isn’t an academic paper. The language is very easy to read and there isn’t a bunch of Greek in the text. What they have done is incorporate a considerable amount of academic research (7 pages of references) about earnings forecasts, price performance, and related subjects into a pretty well done discussion which features loads of visuals.

The book starts off by taking an in-depth look at earning surprises, including empirical evidence of how they are distributed and how their patterns have tended to change over time. It then moves on to look at how stock prices react to earnings surprises. I outlined some of their results in Some Numbers on Stock Market Earnings Reactions. The rest of the book focuses on options trading strategies.

By the way, there’s nothing too complicated about the option strategies, so even if you’re not an experienced options trader you shouldn’t have much problem following along with the discussion. There are lots and lots of examples provided and explained. I would have liked to have seen some empirical data on the performance of the strategies outlined, though.

Short-term options trading is not my personal thing, and I was well aware of the different types of options strategies that could be employed for the type of trading the authors discuss in this book. Still, I found it a very worthwhile read for the information presented on earnings estimates and how the markets react to earnings releases. It’s information I could very likely put to use in other ways in my market analysis and trading. From both perspectives I think it’s a good read.

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Trading Book Reviews

Book Review: Profiting With Condor Options

[easyazon-link asin=”0137085516″][/easyazon-link]The latest trading book I’ve finished going through is [easyazon-link asin=”0137085516″]Profiting With Condor Options[/easyazon-link] by Michael Benklifa. The author’s bio indicates he “manages millions of dollars worth of condor trades every month for private investors”. I opted to give this one a read because condors have become a common strategy talking point, at least among the websites and blogs I pay attention to on a daily basis. I’ve never traded condors myself, so I figured maybe this would be a good introduction to this options trading approach. I’m conflicted as to whether I want to recommend this book, though.

My first problem with this book is that I couldn’t actually find a definition of what a condor is in the text. I was about half-way through the text when this occurred to me and I flipped back through the earlier pages thinking I must have missed it, but to no avail. There are examples of condors, of course, and from that you can deduce what a condor option spread is, but I never saw it properly defined, which is something you’d think should be a feature of a book like this – one which takes a fair number of pages to talk about option basics.

The other problem I have with the book is that it’s rambling. The author covers a lot of ground, but does so in a rather meandering way. The text is kind of disorganized. I don’t mean the overall structure of the material in terms of content progression. That’s generally fine. I’m referring more to the actual writing, which could have done with some editing to produce a tighter and more focused end project. Instead it’s something that can be challenging to follow at times.

Now, I will say that author does provide a very specific set of rules for trading condors. This is mainly for SPX index options because of their liquidity and tight spreads, but he also talks about individual stock options late in the book when he spends a bit of time addressing day trading. This is probably the part of the book that will be of benefit to most readers, whether they actually use the outlined strategy or not.

I guess the bottom line is that I’m not inclined to recommend this as a strictly educational book for someone totally unfamiliar with the subject. For those looking to get ideas how they could apply condors to their trading, however, there’s probably some value to be had.

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