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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.

Make sure to check out all my trading book reviews.

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Trading Book Reviews

Book Review: Buy Don’t Hold

[easyazon-link asin=”0137045328″][/easyazon-link] [easyazon-link asin=”0137045328″]Buy – Don’t Hold[/easyazon-link] by Leslie Masonson is called a investing book, but I’m tempted to put it in the trading category. It depends on how you prefer to define the difference between the two. The book’s subtitle is “Investing with ETFs using relative strength to increase returns with less risk”.  Using relative strength makes me think trading, but there are definitely elements of the approach outlined in the book which speaks toward what I would probably think of as investing. In any case, as I noted in [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link], I look at trading and investing as being functionally the same thing, with perhaps a philosophical difference in approach. I’ll leave it to the reader to make their own judgement.

This book is largely a practical text focused on application. The author outlines a very specific strategy for deciding whether the stock market is to be considered in an uptrend, downtrend, ranging, or turning. His “dashboard” comprises a collection of indicators which are very much technical analysis oriented. They include market breadth indicators, sentiment readings, and some basic price studies. The scoring of the indicators provides the user a market reading from which to develop a strategy. From there, Masonson moves on to picking the best trading/investment vehicle based on relative strength readings. In other words, it’s very much a top-down approach.

On the plus side, the author is very good about explaining the various methods he employs in his strategy. He suggests specific tools (most free, some paid, but not necessarily required) and walks the reader through applying things. On the negative side, much of the first third of the book is dedicated to proving how bad an idea buy-and-hold investing is - definitely overkill there – and I thought in general the writing could have been better. Also, while Masonson does demonstrate the value of the dashboard indicators he uses, he doesn’t actually show a good historical look at how the overall strategy would have done. Still, it’s a book which can certainly provide the fodder for research and development for those interested in longer-term stock market trading/investing and/or asset allocation between and among markets.

Make sure to check out all my trading book reviews.

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Trader Resources Trading Tips

Thoughts on CANSLIM

Last week I received an inquiry from a fellow member at Trade2Win.

I have your book and I think its great, im about half way through. I have read some of your posts here and think you give excellent consistent answers. I read that you are a canslim follower with a small deviation. Im not by any means looking for easy answers but the way I see it is surely canslim is too abvious and prone to manipulation to work in its pure form? I was wondering what your interpretation of canslim is, as I have much respect for your work.

What’s CANSLIM?
First of all, let me clarify what we’re talking about here. CANSLIM is the acronym for a stock trading system developed by William O’Neil, creator of Investors Business Daily (IBD). It can be found in the book How to Make Money in Stocks, which is now in its 4th edition. The original edition is one of the first books I read about when I was getting my start in trading and I still consider it to be perhaps the single most influential of all the one’s I’ve read.

To put it most simply, the CANSLIM approach combines technical analysis and fundamental analysis into one full long-only individual stock trading system. On the technical analysis side the focus is really only on chart pattern analysis. It doesn”t employ or even discuss indicators. As for the fundamental analysis, it is has both top down and bottom up elements to it, but is mostly the latter – focusing primarily on the companies.

Gaming the system
Here’s where the cynicism of the modern trader come in to play. The trader asking me about CANSLIM has suggested that it’s “too obvious” and “prone to manipulation”. I personally don’t see it that way.

To be sure, there is definitely some CANSLIM gaming that goes on, but it’s more about the lists the folks at IBD publish than the core strategy. There is a list of 100 stocks the IBD folks put out each week (I think) which lists the stocks they consider the best bets based on the CANSLIM criteria. Because inclusion in that list can generate a great deal of investor action in a stock, there are those who try to anticipate stocks joining the list and trying to profit from the bump new entrants can see. This, however, is a minor thing in the grand scheme.

Richard Dennis, creator of the Turtles, was reported to have said that he could publish his trading system rules in the paper and not have to worry about it hampering his performance. I’m with Dennis on that. There are millions of traders and investors using a vast array of methods for deciding what and how to take positions in the markets. Even the ones using the same system have variations in how they are doing so in terms of timeframe and instrument and such. On top of that, there are always those who simply can’t stick to the rules. We know this to be true. That’s one reason why I don’t see the CANSLIM methodology as being “too obvious” or anything like that.

Further more, CANSLIM is based mainly on intermediate and longer-term trends. These are not readily manipulated because they are generally founded in core fundamentals, like the trend in earnings.

Laying it all out
Those who have read The Essentials of Trading know that in the appendix I have posted the full stock trading methodology that I have used for many years and continue to use at present. As noted in the book, it has CANSLIM as the foundation. I’m not saying the CANSLIM methodology is for everyone. It isn’t. From the first time I read How to Make Money in Stocks, though, it made intuitive sense to me, and still does.

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Reader Questions Answered

Picking a Broker

I got this broker question the other day.

The single most important question would be what broker do you use to trade your personal money(not a demo account)?  Secondly who would be someone there to contact you personally deal with?

For stocks and options I still have the original brokerage account I opened lo these many years ago. That’s with Charles Schwab. I’ve never seriously looked at anyone else because I’ve been satisfied with the service and all of that, so I was never motivated to make a switch. I’ve heard good things about others, but as I haven’t personally explored them yet myself, I do not feel comfortable commenting on them.

On the futures side, I currently trade with PFG Best. In the past I have used Lind Waldock and Interactive Brokers. I’ve been satisfied with all of them, though they will all appeal to different types of traders.

In forex I experimented with several different brokers before ending up with Oanda. I also use them exclusively in my trading education work. They are considerably different from other forex brokers in that they have no fixed lots or minimums of any kind.

I do not have personal contacts at any of the above brokerages except at PFG Best. In that case, however, my contact has move out of futures.

All the above said, I do not specifically recommend any of the above brokers for any given person. Each of us has different needs which some brokers address better than others. You should absolutely do your research and not just take my or anyone else’s advice without looking into things yourself.

One final note. Especially in the forex realm there is a lot of slamming of brokers on forum sites and whatnot. Some of it is legitimate, but if you just go by that stuff you’ll be scared of every broker out there. Keep in mind that people have a strong tendency to complain rather than praise and traders who have lost money are prone to wanting to place blame on someone other than themselves. In other words, take it all with a grain of salt.

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Trading Tips

Defending Options Trading Against Blogger Attack

A fellow trading blogger wrote some things which really irked me. I’m not going to say who it was or link to the post as I normally do because basically all the guy does is plug his trading system in every post. He’s been on a multi-post rant about how people shouldn’t trade options or futures, or any other leveraged instrument for that matter. Two of the quotes this individual made in one of his recent posts in particular caught my eye.

With options trading, you need really good money management skills and many positions for diversification purposes.

If we took “options” out of the above sentence the first part of it would be fine. Good money management is a requirement of trading in ANY market. As for the requirements for diversification, to the extent that someone is going to diversify, it applies equally to any type of equity trading.

By the way, while investors who plan on long holding periods would do well to diversify their holdings, the same doesn’t necessarily hold for traders. In fact, the latter are better off keeping things concentrated so they can properly track their positions.

Since both options and ultra ETFs are about leverage, it makes more sense to go into ultra ETFs because they’re generally much safer than options and offer similar outsized returns.

I can’t help but wonder how the blogger is defining safety. If it has anything at all to do with the potential to take a loss larger than expected, then the ETFs are riskier than owning options, not safer. It’s a very simple thing. If you buy an option your risk is clearly defined. You can’t lose any more than what you paid. In the case of an ETF, however, you can easily lose more than you intended to risk because even if you use a stop there’s no guarantee of a fill at your exit price.

Now, if the blogger is equating risk to the odds of taking a loss, then that’s a different conversation. I’m still not going along with his take on things, however, because as I’ve previously noted in other posts, win % (or loss %) is not the sole determinant of performance.

I’ve said it before. It’s not leverage that creates risk. It’s how you trade. I personally prefer options for my equity trading because I can strictly define my risk and better manage positions on a running basis, plus they require less capital. That said, however, options suit the way I play the stock market. They will not do so for everyone.