News & Updates

Book Reviews for The Essentials of Trading

I had been noticing a lot of recent buying activity in The Essentials of Trading lately. I figured something must have come out, and with a little searching I found that indeed is the case.

Both Technical Analysis of Stocks & Commodities and SFO have both featured the book in their July editions. Here is what they had to say.

Stocks & Commodities (July 2006)

“Buy low. Sell high.” It sounds easy, but the reality is very different. Changing market trends can make for turbulent trading. Lack of concentration can lead to costly mistakes. This book is written for those just beginning their journey into trading and provides a base of knowledge from which you can develop trading methods, systems, and techniques that suit you best. From the basics of analyzing a stock and placing a trade, through trading plans and risk management to the building of trading systems, this is your source of practical advice.

SFO (July 2006)

The Essentials of Trading is no $200, 600-page B-School text, but its writing style and format – yes, there’s homework – probably make this book a better fit for aspiring traders that thrive in a classroom structure: in this case, a self-directed course that tucks into a gym bag or bedside table drawer.Author John Forman packs into these nine chapters the best of his students’ struggles and breakthroughs on their way to profit. But lest anyone feel a pre-finals cold sweat coming on, it’s important to stress the efficacy of this approach. After all, Essentials is meant for novice, do-it-yourself investors willing to put in the time to learn the ins and outs of more complex markets. Forman gets the reader quickly from theory to practice with his emphasis on journal keeping and his dozen or so assignments throughout the book, including calculating win/loss ratios and following detailed steps for several dry runs on a mock trading platform.The theory portion of the book centers on psychology and risk-taking, understanding the mechanics of markets and the anatomy of a trade, plus determining what factors influence prices, and reading and analyzing price patterns.Those who learn best by example can rest assured that the author’s experience isn’t exclusively academic, and neither is his book. Forman has readers begin with elementary steps like recording market reaction to major economic indicators, court decisions or merger announcements. Readers soon advance to building their own trading strategy: how much can they risk; when and for how long will they trade; what are their expectations? They’re next directed to develop a risk management plan: tackling stop-loss trades, hedging and calculating value at risk (VaR), which is loosely defined as a portfolio’s stress limit over a given time frame. Forman helps readers make sense of fundamental analysis, technical analysis and the blend of both in quantitative analysis.

In the final chapters, those soon to graduate to live trading develop and test at least three systems to find the best match to their strategy. In simpler terms, students are setting up a series of pre-determined rules: go long if/when …; exit long if/when …, etc. Determining trade size and measuring performance round out the final pages, while the appendixes offer sample systems of varying complexity.

Forman seems to hinge new traders’ success on their dedication to journaling and review about as much as he emphasizes practice trading. That’s well-meaning advice likely to resonate with anyone who’s ever tackled a new pursuit steeped in theory. At the same time, some readers, particularly those kept busy with their day job or a family, may feel overwhelmed to keep the kind of thorough diary entries that the author recommends.

Clearly, the book is meant to be paired with the author’s analytical and trader community websites, given its several references to both. And Forman’s step-by-step walk-through of mock trading is limited to just one site — Oanda’s foreign exchange platform, called FXTrade. The author explains there’s no particular endorsement here for Oanda or any nod given to forex over other markets. (In fact, his sample system in the final pages is for stock and stock options trading). Forman says Oanda differentiates itself with its unlimited trade duration on its demo sites and its variable trade sizes, among other features, and the 24-hour currency market means neophyte traders can practice any time they want. Oanda’s prominence in The Essentials of Trading isn’t meant to discourage readers from perusing the fast-changing world of Internet trading for other practice platforms.

As with most how-to trading books, this one is rich in charts and tables. Even skimming eyes are quickly drawn to the gray-highlighted text boxes that offer anything from trading term definitions to a quick review of the equation for calculating moving averages, to anecdotes from traders’ blogs. This feature makes the book a handy reference to leave near the monitor well past the practice days.

Equal parts lecture and lab, The Essentials of Trading will help those contemplating hands-on investing to determine whether they’re cut out for the perilous and profitable world of global financial markets. If they proceed, Essentials will have armed them with the tricks for discipline and risk management. From there, the real lessons will come from trading.

Can’t complain too much about that!

Trading Tips

Trading doesn’t just mean stocks

For most people, especially those who either aren’t involved in the markets or haven’t been for long, the word “trading” often is taken to mean stocks. That is certainly a function of history and the media. For a great many years the stock market was really the only one an individual trader could reasonably trade.  Add to that the fact that business programming like CNBC tends to have a heavy focus on the stock market and it’s pretty easy to understand why stocks come to most peoples’ minds right away when trading is mentioned.

Of course the reality of the markets is that there is way more to trade than just stocks. In fact, it could very easily be argue that the stock market is least important in the grand scheme of things.  This is something I first observed after college when I started my first market-related job.

The thing they never teach you in business school (at least mean anyway) is how very big and influential the fixed income market is. That’s the market based on interest rates of various timeframes from overnight out to 30-years and beyond. That market determines your mortgage rates, the interest you pay on your car loan, and what your credit card company charges you on outstanding balances.  It is heavily influential in foreign exchange rates and definitely can seriously impact company earnings and stock price valuations.

Trading in the fixed income market is huge.  There is loads of volume and lots of liquidity.  That’s why so many of the big players are active their.  They can easily get in and out of trades without pushing prices around too much. 

But the little guy can trade fixed income too. It’s done through the futures markets in things like Treasury Bond contracts.

The point is, don’t let yourself fall in to the trap of believing that stocks are the be all and end all to trading. There are lots of other options out there, some of which might be a better choice for you, and more interesting.

Trading Tips

A Little Trading Story

I got an email from Trading Markets yesterday.  As you may be aware, I have been contributing commentary and analysis to their site for some time now.  I guess they’ve got a new project they’re working on, and they asked me to write up a few articles to help get it launched. I happily obliged.  One of the subjects was “My Worst Trading Mistake”.  I figured the story I submitted had some educational value, so I’m posting it here as well.

This falls under the category of pure stupidity.

Once upon a time I opened my first futures trading account. I put in $5000 which I had saved up.  It was a very exciting, and more than a little scary.  From a knowledge perspective, and from a price movement point of view, I totally understood what I was getting in to. 

Actually pulling the trigger, though, is a completely different story.

I had traded stocks for years.  The futures account was my first foray in to leveraged trading. In stocks, while there is certainly the risk of taking a substantial loss, it generally isn’t going to happen nearly as quickly as can sometimes be the case in futures.  That thought was what had my knees shaking as I made my first foray in to the market.

As it turns out, I was right to be afraid.

My very first trade was in Japanese Yen futures. I can’t recall the specifics about the analysis that went in to the trade, or even if I was going long or short.  I do remember fighting the anxiety for a long time before I actually finally pulled the trigger.

Let me back step a little.  I am talking here about a time when online futures trading platforms were just in their infancy.  There wasn’t any real electronic trading.  You weren’t doing much more than using the internet to submit an order to your broker’s desk just like you would do calling them.  The process was slow and getting your fills took forever by today’s standards.

My first trade wasn’t going my way after some period of time, so I went in to close out the position.  The problem was, however, that I accidentally doubled up my position instead.  By the time I caught the mistake, it was too late. 

When the dust settled, I was down something like $4000, a hit of 80% on my account value in a matter of hours.  I was literally sick to my stomach.  My coworkers must have thought someone died.  I’m sure I looked that bad. I’ll always remember that feeling.

Can I say that I’ve never messed up an order entry since that time?  Definitely not.  It’s been infrequent at best, though, and I’ve certainly never taken a hit like that one since.  Remembering those feelings is likely to keep me from ever bungling things like that again!

Now please don’t take this as any kind of comment against the futures market.  After this particular little set-back, I regrouped and came back with a vengence.  When I recoverd and got back in to the market it was a MUCH different story!

Trading Tips

Trading Courses: Save Your Money!

The other day I was having a conversation with a guy in the futures brokerage business.  We were talking about trading education and got into a discussion on how much money people have spent on trading classes, course, coaching, and whatnot.   He was remarking on a gentleman he knows who spent $15,000 on a week’s worth of personal coaching, and that was just one example.

Now I’ve been around the trading game long enough to have heard stories like that before.  Even still, it blows my mind to hear that someone was willing to lay out that kind of money.  I know why they do it. They think they will learn the thing which will make them masters of the market.

A lot of money is wasted
The sad thing is that most of the time the money is wasted.  What’s even worse is that sometimes the new found trading knowledge ends up costing the trader money in the markets on top of the hit they already took to their bank account.

Now I’m not trying to say that all trading and investing educations and support products and services are a waste of time and/or money.  Everyone has to learn somewhere.  Ideally we have someone who can mentor us, but mentors can be quite hard to come by, so we have to make due with what’s available.

What I am saying is that too much money is spent on trading and investing products and services in an ill-advised fashion.

The financial markets can be complex.  They offer a wide array of arenas and instruments one can trade.  There are all kinds of methods and techniques for identifying good trades and making money management decisions.  There are scores of products and services intended to teach you how to play the market and/or help you do so.  While there certainly are some of dubious character operating in this field, as in any business, the vast majority of the people providing such offerings are honorable folks with the best of intentions.  I know this from experience.

Avoiding wasting your money
Here’s where people go wrong plunking down their hard-earned money, though.  They don’t properly position themselves before venturing in to the realm of trading education and support products.

By this I mean a lot of money is thrown away by folks who sign-up for this seminar or that course without even considering first whether that particular seminar or course is right for them.  There is a tendency among folks just getting in to the markets to try to go from zero to super performer in one leap.  As anyone who’s spent any time at all in the market can tell you, that just doesn’t happen.

The mistake being made isn’t that these market rookies attend a seminar or take a class.  The error is in not first taking a very hard look at themselves and their situation before deciding on a direction to take.

When I wrote my book, The Essentials of Trading, my first intent was to teach people how to get up and running in trading – to teach them the most basic of elements.  It was something I had been doing with college students.  That’s just the start of things, though.  Learning to trade is more than just learning to enter and exit positions.

The bulk of Essentials has to do, however, with getting the reader – presumably a novice – to take a very hard look at who they are, how they best operate, their time availability, and the resources they have at their disposal.  I did that because any given individual’s success in the markets is primarily dictated by their ability to find something that works for them.

When I talk with new investors and traders, that idea of finding your own course is something I really try to hammer home.  It is very hard to make money with someone else’s system or method.  Why?  Because it was designed or created by someone else for their purposes, not for yours.

Can you make another person’s trading method work for you?  Yes, but only if you understand first what you need to do to be successful.  That means doing a personal assessment, such as the one readers of The Essentials of Trading are taken through, to lay the groundwork.  It’s about figuring out what market to trade, what instruments to use, the market analysis method used as the basis for trade decision-making, and the time frame to operate in, among other things.  Once that’s done, you can confidently navigate the myriad of products and services available out there, selecting only those that fit in with the what and how you’ve decided to take as your approach to trading or investing.

Books are a good, cheap start
Keep one thing in mind, though.  Books are generally going to be the least expensive educational tools.  Make use of them before considering spending significantly more money on courses, seminars, etc.  They will help you learn about markets and methods so you can get yourself properly oriented before delving into the more specific elements of the system or technique you’ll use to trade.

The primary lesson is that you should not go the seminar, course, and advisory as your method of figuring out your approach to the market.  That’s how large amounts of money get wasted.  If you figure out your approach first, then look for the educational and/or support products and services to support that, you can save yourself loads of money and regrets on time and cash wasted.

News & Updates

Amazon ‘Top Seller’

Thanks to a fantastic book launch celebratory promotion, The Essentials of Trading became an Business & Investing ‘Top Seller’ on Thursday.

Very cool! 

My publisher is super pleased, naturally, and it’s a lot of fun to be able to say that The Essentials of Trading is a best seller.  The fact that my book stood shoulder to shoulder with some of the major titles on the market today is amazing!

So what’s next?

Hopefully a few days of rest, first.  I’ve got some very interesting projects in the works, though.  Check back on Monday to see what’s in store.

Trading Tips

Check out the Bond market – it could be worth your while.

The fixed income markets tend to not draw a huge amount of attention from the individual trader, even though they are massively traded by institutions.  Maybe it’s the whole price goes up, yield goes down inverse relationship thing that makes people’s heads spin and keeps them focused on the stock market, and increasingly the foreign exchange market.  Too bad.  Fixed income not only directly impacts those other two, it can really be a rewarding market to trade. (If you are unfamiliar with fixed income trading, take a look at this article).

Right now a lot of my attention is on Treasury Bonds.  This is something I pointed out to readers of my newsletter back in March.  It was becoming obvious that the pressures were building on the long end of the yield curve which would eventually mean an increase in rates.  After all, we’ve had huge run ups in gold and oil, the stock market is strong, the global economy is doing well, the Fed is still raising rates, and the dollar has been a little soft.  It was inevitable that the Bond would start moving lower – yields increase.

At that point June Bonds were trading between 111 and 112.  The key break was taking out the 110 level, though.  To me that was the important development.  That represented a break through real weekly chart support, which signaled a substantial drop.  There is pretty good support in the 104-105 area from the lows posted during the first half of 2004.  I think we will eventually see the market testing that area.  It might take a little while, though.  The drop from 110 has been fairly sharp, putting the market in a borderline oversold condition.  Today’s sell-off aside, it would not surprise me if things stalled out for a spell.  Even still, I still think we see a test of 104-105 by June.

I will be watching the longer-term (monthly) charts quite closely over the next couple of months.  We’re on the brink of something big, I think.  More on that later, though.

Trading Tips

Trader Development: The Value of Coaching and the Difficulty of Finding One

Trader education has become a hot topic in recent years.  Everywhere you look there is someone offering some course, seminar, training program, or whatever.  Many are very pricey, and we can certainly debate the real value of quite a few.  The proliferation of the products and such can’t help but bring up some of the commonly debated topics related to whether traders can be taught or just have some innate talent which allows them to succeed.  This article makes its own contribution to that discussion.

My starting view
In the interest of openness, my personal view is that anyone can learn to trade effectively.  By that, I mean we are all capable of trading toward a reasonable and rational set of goals and/or objectives determined by our own personal situation and means.  Can everyone become George Soros, Paul Tudor Jones, or Warren Buffett?  No, of course not.  If we could all do that, those names wouldn’t be as big as they are.  Most people simply don’t have the kind of resources traders like that have at their disposal.  We all do, however, have the means to trade well within the scope of the money, time, risk tolerance, and other elements of our trading focus.

Education is the foundation
The starting point of effective trading, as with anything else in life, is education.  There are certain things one needs to know in order to trade effectively.  What those are vary a bit based on the market traded and instruments utilized, but there are some fundamentals.  For example, all trading is based on the bid-offer mechanism at some level.  There are numerous types of orders for entry in to positions and exit from them.  There are exchange hours and instrument specifications.  Brokerage commissions are a feature in most markets, and in all one needs to understand how profits and losses are determined.  I think we can all agree that these are some of the basic building blocks of knowledge and understanding required to even contemplate trading.

At the next level we start getting more in to comprehension of the market action, its interpretation, and knowing how that translates in to profit opportunities and risk.  On some level, trading requires analysis to make buy/sell decision – fundamental, technical, or quantitative.  For the mechanical trader, that analysis is done through research in the development of one’s trading system.  For the discretionary trader it is more an on-going process.  Likewise, some kind of risk management program is a requirement, regardless of trading style or analytic method.

All of this kind of core knowledge and understanding can, in my opinion, be learned from books, lectures, seminars, courses, etc.  It is akin to earning a degree.  In order to get that diploma, one must prove that certain things have been learned, skills gained.  Once that is done, however, one’s development becomes a more personal journey.  It is the same thing in trading.  There is a basic set of knowledge we must gain, but after that it is up to us to forge our own path in the markets as our own personal situation dictates.

Here is where things start getting muddled.

Determining our own path
We must each determine our own course in trading, ideally based on a good assessment of the resources we have available to us.  There are so many ways we can go, though.  Everywhere there are people telling us that this path or that path is the one we should take.  How are we to decide?  Most of us end up stumbling along through a trial and error exploration of various systems, methods, techniques, and whatnot.  Some of us find something that works.  A great many do not, and quit in frustration, or broke.  This is where having a coach or mentor can make a huge difference.

We need look no further than the world of athletics to see how important the role of a coach is to one’s development.  I happen to coach high level collegiate volleyball, so please permit me the indulgence of using that sport as an example.

There are certain physical attributes which can be strong determining factors for one’s success in volleyball – height and jumping ability being two of them.  As the saying goes, you can’t teach height, and while a coach can help one jump higher, genetics goes a long way to determining what a given athlete can do in that regard.  Being tall and able to jump high, however, does not guarantee success, and one can be quite good at the sport without being a top physical specimen.  There is a lot more to volleyball, and that is where coaching comes in.

Coach as facilitator
The role of the coach is basically that of facilitator.  He or she aids the athlete in the development in their skills and the refinement of the game.  For the novice that means a lot of teaching in regards to skill execution.  When working with experienced players, it become much more a question of refinement and showing them how to apply what they know to the best effect given the situation at-hand.

Coaching or mentoring in trading should be the same thing.  The advantages of having someone to oversee your development are many.  There is the obvious element of teaching, as it is often assumed that the coach knows more about the markets and has more experience in them than the trainee.  Possibly even more important, however, is the coach’s role as external observer.

When I coach volleyball, I can see things a player is doing incorrectly that they cannot see because they lack the proper perspective.  I can then tell them what they are doing wrong and help them correct it.  A trading coach can do the same sort of thing.

Emotional element added to the informational one
At the same time, there is the mental and emotional element to coaching which is separate from the teaching one.  Especially in the case of experienced athletes, it is often more a question of maintaining a proper level of motivation and a high degree of confidence to ensure peak performance than anything else.  The same can be said of trading, where one’s mental state often seriously influence one’s performance just as it does in athletics.

The question of where one finds a coach or mentor is a difficult one.  Brett Steenbarger (author of The Psychology of Trading) and I recently discussed this very topic.  There are certainly a great many experienced traders out there willing to share what they know in one way or another.  But are they really prepared to provide the guidance needed?  Some may be good teachers – imparters of knowledge – but lacking in the ability to be a coach in the full sense of the word.  Others might be great motivators, but perhaps do not have the breadth of knowledge and/or experience needed for the educational element of coaching.

Obstacles abound
There are two major obstacles to finding a good trading coach.  First of all, it is the tendency of many people to look for someone who’s had a great deal of success as a mentor.  The problem with that is in a many cases those people are not well equipped to coach.  It’s something seen in athletics all the time.  Look to the ranks of coaches in your favorite sport.  How many of them can you point to and say he or she was a great player?  Now consider how many were good players, but not superstars.  There are way more of the latter in the coaching ranks than the former because the average players tend to have to work harder and become better students of the game to be competitive.

The other difficulty in finding good trader coaches is that there are no real training programs for these people.  As a volleyball coach I can go to training seminars and courses, earn national and even international levels of certification, and work under the direction of other coaches more knowledgeable and experienced than myself.  As yet, there is no such readily available structure in trading.  We cannot look, for example, at someone’s resume and see that he or she is a Level III certified coach, having been so declared by a recognized training and testing organization.

What to do
So where does that leave us?  Well, clearly there is value in having a coach to help us maximize our performance in the markets.  As things currently stand, though, finding a good one for our particular situation is going to remain a challenge.  It requires the discipline to not just look at someone’s returns and assume that they can teach you how to do that yourself (remember, teaching you a trading system is not the same as coaching you through applying a trading system).  It also requires legwork to check out a possible coach.  Have they coached others before?  Get references.  Make sure you find someone who will fulfill your particular requirements and be a good match.  If you can do that, you should see your development as an effective trader really take off.