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Trading Book Reviews

Book Review: Trading From Your Gut by Curtis Faith

[easyazon-link asin=”0137047681″][/easyazon-link]One of the books I put near the top of the pile in terms of practical usefulness is Way of the Turtle by Curtis Faith. Not only does is provide a view of Faith’s experience as one of the famous Turtles, but it also takes a good look at trading system design and development. In his new book, [easyazon-link asin=”0137047681″]Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader[/easyazon-link], Faith takes a different approach, one that would seem to contradict his earlier focus on systems. After all, instinct and gut feel would seem to be the complete opposite of system trading. It’s not really that simple, though.

At the core, Trading from Your Gut is about integrating the right-brain instincts and intuition you develop as a trader with the left-brain rational side from which systematic analysis and trading tends to flow. Faith spends a fair amount of time arguing for why that is important. In fact, the better part of the book could be said to fall into that area. The idea is that combining the two parts of your brain will make for much better results than either one on its own.

Now, having said that, Faith considers the swing trading timeframe the most optimal for trading with both sides of your brain. Real short-term trading, he contends, favors a more intuitive approach, while the timescales of long-term trade suit a more left-brain approach because there’s plenty of time to think things through rationally. It’s worth noting that an awful lot of traders seem to want to go the other way, make gut calls on long-term trades, but use mechanical systems for short-term trading.

If you’re looking for short-cuts to develop intuition, though, you’re out of luck. Faith tells you what you should already know – that you can only really do that by trading. That said, he does provide some tips for making the process more efficient and effective. There is, of course, a lot of trading psychology discussion in the book, which given the subject matter shouldn’t come as a surprise. In fact, Van Tharp wrote the foreword.

As much as I do believe this is a worthwhile subject, I think Faith had to do a lot of stretching to get it to be a book. There is clearly a lot of filler at the end to get close to the 200 page count, including a discussion of the forex book he has in the works. I think when you boil down to the meat of what he’s trying to get across you really only have a couple chapters. My personal feeling is that this material, at least as it is currently developed, would have been better off as a section on a more expansive book on trader development, or even trading systems.

My bottom line is that overall I came away a bit disappointed in a kind of “does not fulfill its potential” sort of way. I don’t think this was Faith’s best effort. It doesn’t disuade me from wanting to see what is next book offers, though.

Be sure to check out my full list of trading book reviews.

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Trader Resources

More Upcoming Book Reviews

The other day I mentioned a pair of books that were new additions to my reading list. Thanks to my brother adding a few more books to my library, I have another pair that I will be reading and reviewing in the weeks ahead.

The first book is Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange by Marc Chandler. I think I’m going to tackle this one first, as it’s seems likely to be pretty relevant to current market events. From the Amazon description:

“Has the greenback really lost its preeminent place in the world? Not according to currency expert Marc Chandler, who explains why so many are–wrongly–pessimistic about both the dollar and the U.S. economy. Making Sense of the Dollar explores the many factors–trade deficits, the dollar’s role in the world, globalization, capitalism, and more–that affect the dollar and the U.S. economy and lead to the inescapable conclusion that both are much stronger than many people suppose.”

The other trading-related book my brother gifted me was Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber. As I understand it, this book is something of a history of how quantitative trading has developed on Wall Street and throughout the financial markets. The Amazon reviews are mostly good, though one reviewer really takes the book and the author to task for what he sees as short-comings. I don’t go into reading the book with any preconceptions, though.

Remember, I keep a running list of trading book reviews I have written here. Make sure to check it out, and feel free to suggest books not already covered.

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Trader Resources

Upcoming Book Reviews

There are a couple of books I will be reading in the near future, the reviews for which I will no doubt post here shortly thereafter.

One of the books is The Age of the Unthinkable: Why the New World Disorder Constantly Surprises Us And What We Can Do About It by Joshua Cooper Ramo, which I was surpisingly gifted yesterday. This book has been on my wish list for several months now. This is less a trading book than a bigger picture politics/economics discussion, though. It will probably be more of interest to those who like reading and talking about that sort of thing.

On the trading side, I will soon be receiving Curtis Faith’s new book Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader. You may have seen my previous review of Faith’s earlier book, Way of the Turtle. I rate that book very highly, which is what encouraged me to pick up this new book when given the opportunity. From the description at Amazon “In Trading from Your Gut, Curtis Faith, … reveals why human intuition is an amazingly powerful trading tool, capable of processing thousands of inputs almost instantaneously. Faith teaches you how to harness, sharpen, train, and trust your instincts and to trade smarter with your whole mind.” I’ll definitely let you know what I think of how he does there.

In case you weren’t aware, I keep a running list of trading book reviews I have written here. Make sure to check it out, and feel free to suggest books not already covered.

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Trading Tips

Trading Education is Not Just About Trading Systems

The following comment, sent to me by email, and referring to the Market Wizards and The New Market Wizards books, strikes at the very heart of why so many folks end up crashing and burning when it comes to trading, or take longer than necessary to reach a reasonable level of success.

They are not worth reading. None of the wizards share any of their strategies. A complete waste of time in my opinion.

First of all, the statement that none of the wizards share their strategies is technically incorrect. William O’Neil from the first book is quite specific about his methods (you can also find it in his book How to Make Money in Stocks). I will admit that most do not specifically share their methods, but some of those can be found in other sources. For example, the Turtle system employed by Richard Dennis (first book) can be found in Way of the Turtle. Furthermore, many of them trade in a discretionary fashion not readily quantified.

That is so not the point, though.

I see the attitude of this emailer in trading book/product reviews all too often. For some reason these individuals think a book which doesn’t lay out a specific trading system or methodology is useless. This is a foolish, narrow-minded viewpoint. In fact, I’ll turn that thought process around.

Trading systems outlined in books are worthless (at best – very costly at worst) to the vast majority of traders.

Why do I say that? For the very simple reason that most trading systems won’t work for most people. I’m not saying the systems are not, or cannot be, profitable. They just have specific time frames or markets or risk characteristics which are suitable to only a relatively small number of traders. What works very well for one person won’t work nearly as well for most other people because we all come at the markets differently.

The value to be found in books and other educational resources is not in specific trading systems and like. It’s in how the resource guides us in the development of our own unique way of taking on the markets. The reason I always recommend the Market Wizards books is that the allow the reader to benefit from the experience of a group of highly successful traders, ones who had to overcome many of the hurdles we all face on our development path. In their interviews they share how they did that.

I know my own development as a trader (and eventual professional analyst) was seriously accelerated by reading the Market Wizards books. I was able to understand from their experiences the pitfalls I should watch out for and where there might be opportunities for me to pursue things. In that way they gave me much more than I would have ever gotten from some trading system.

(P.S.: If you haven’t already had the opportunity to see/hear Market Wizards author Jack Schwager speak about what he took away from those he interviewed for the books, then I suggest you check out Market Wizard Insights, available at no cost here.)

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Trader Resources

Learning from the Market Wizards

Two books I always recommend to traders are Market Wizards and The New Market Wizards. Both offer a lot of great information and advice, and are motivational to boot. I actually had the opportunity to meet and interview the books’ author, Jack Schwager, back in 1992 when he was working for Prudential Securities (if I remember correctly) on the research side. He’s an interesting individual and has a great deal to offer traders as a result of his interaction with all those he profiled in his book.

Jack periodically does seminars on the subject of the lessons to be learned from the Wizards. I’ve had the opportunity to see them on a couple of occasions. Obviously, there’s a lot of overlapping content from the books, but it’s more than that. Jack is a very good speaker and in his seminars he presents in a really accessible way the lessons and themes he’s learned from the traders and money managers he sat down with.

If you haven’t already had the opportunity to see/hear Jack speak, then I suggest you check out Market Wizard Insights, available at no cost here.

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Trader Resources

Motley Fool Acting the Part

I recently had the opportunity to pick up a free copy of the latest Motley Fool book, Million Dollar Portfolio. I’ve never spent much time looking at what the folks at Motley Fool do, though I know their focus is on stock investing. With that and the idea that I could provide my readers with a review of the book when I finished, I decided to go ahead and get it.

I’ve only just started reading Million Dollar Portfolio as part of my daily commute. It will probably take a little while to get all the way through, so you’ll have to wait for a the full review until then.

There is one little thing I need to comment on, however.

At the start of the third chapter, in classic investor book fashion, the authors attempt to demonstrate why a buy-and-hold approach beats a trading approach. Taxes and transaction costs are the noted culprits which make trading much less worthwhile than investing.

Here’s the problem, though.

The example they use is so completely erroneous as to be farcical.

A scenario is offered in which you can either invest $1000 in a stock which makes 7% per year, or you can use that $1000 to play one stock each year that makes 12% per annum. Transaction costs are $10 per side. Short-term capital gains taxes in the U.S. are 15%. Long-term capital gains taxes are not listed, but are said to be higher. The authors claim that the 7% option turns the initial into $6137, while the 12% option actually only gets you up to $3073 after all the transaction costs and taxes which come out along the way.

Seems like a pretty good argument for investing, doesn’t it?

It’s a complete crock!

The numbers don’t work out at all. All we have to do is look at where each portfolio is at after one year to see the error.

At the end of the first year the 7% portfolio is worth $1070 ($1000 x 7%). Actually, if we take out the $10 commission for buying that $1000 worth of stock the real value is $1060.

Where the 12% portfolio value is at in one year depends on the short-term capital gains tax rate. That year’s trade will make $120 ($1000 x 12%). We need to take out $20 for transaction fees, so that leaves a $100 profit. Now, if the tax rate is more than 40%, then the 12% portfolio ends up with a final value lower than than the 7% one. At 40% the two are the same. Any tax rate lower than that the 12% portfolio is the winner.

A little investigating indicates that the top end U.S. short-term capital gains rate is 35%. My calculations indicate that at such a rate the 12% portfolio would end up with a final value close to $9000. That’s considerably better than the $6137 the authors indicate would be the final value of the 7% portfolio (though my calculations put it somewhere closer to $6500).

On top of this funky math, they get even more ridiculous.

Motley FoolThe Motley Fools cite a report from Charles Schwab which says that short-term traders need to make 21.2% more than the longer-term ones to offset the taxes. Somehow they translate this figure to mean it would take a 48% annual pre-tax return to better the 7% portfolio’s results. I really don’t know where they pulled that number from. It clearly, though, has no basis in reality.

I’m not arguing here against the overall contention that longer-term traders have lower transaction cost and capital gains hurdles to overcome. They most certainly do. Traders need to be pretty sure they are going to considerably exceed the returns they would expect to get from a buy-and-hold strategy in order to make trading worth their while. I just have really hard time respecting the conclusions put forward by someone who is so painfully off in constructing their arguments.

Do you have any thoughts about or experience with Motley Fool?

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Trader Resources

Forex Market Seasonal Patterns – Really!

Much of the time, when the idea of seasonal patterns is brought up in trading and the financial markets it is related to commodities. The commodity market, with its production cycles (crop harvest times, winter heating, summer driving, etc.), has some very obvious seasonals which impact the way prices move. This is all well documented.

The foreign exchange market, however, is not generally one where people thinking about the seasonal impact on prices. They exist, though. I’ve done research on the subject confirming that.

Several years ago I noticed an interesting pattern in EUR/JPY by which it rose regularly during a certain month of the year. I was able to use that knowledge profitably and it got me wondering if there were more such patterns. I wasn’t really expecting to find any.

Needless to say, I was surprised when calendar patterns showed up all over the place – in many different currency pairs, at all different times of year, and in both short and longer term timeframes. Knowing that information was something many traders would probably find extremely valuable, I put together a full 175 page research report – Opportunities in Forex Calendar Trading Patterns.

That was back at the start of 2006. I updated Opportunties at the start of 2007, but decided after that to retire the report. Toward the end of 2008, though, I started getting regular inquiries about it – traders wondering if it was still available. After asking around and finding out that there was definitely interest, I decided to revive the report.

Actually, I went a bit further than that. I completely overhauled and expanded Opportunities. It’s now 260 pages and even more useful than the previous editions. It covers all of the majors and major crosses, plus I created a set of individual indices for the major currencies (similar to the Dollar Index) to look at the general patterns of individual currencies outside of specific pair relationships. If you trade forex you’ll want to take a look for sure.

I’m not going to say I understand why all these patterns take place. It obviously has something to do with capital and/or trade flows during different times of year. I’ll leave the explanation of that sort of thing to someone more in the know on the subject than I am. I just want to know it’s going on so I can put that information to use in my trading.

Seasonals, of course, aren’t guarantees that the market will trade a certain way at a given time of year. What they can do, however, is help you put the odds in your favor. That’s really half the battle in successful trading.

If you want that extra edge for your trading, I definite encourage you to check out my forex seasonals research report.

P.S.: Much to my surprise, I was just contacted by a group in Singapore about getting copies of the report for libraries, companies, etc. That was quite interesting, especially since I haven’t really done much by way of getting the word out yet.