Trader Resources

Great Review of the Trader FAQs Book

Fred Elkins from Finance Banter wrote up an excellent review of my new FAQs book. I took the first part if it for use as a short testimonial on the book’s website. Here’s the full text, though.

Every trader needs a mentor. A sober third party that can provide input, advice, direction or just a different point of view. Trader FAQs gives you a dozen. John Forman has gained access to a group of successful traders whose combined 150+ years of trading experience are laid out in Q&A format to help make you a better trader.

John has posed questions to the traders on various topics from getting started to trading education to building your trading system and picking a broker. All of the things you need to know to trade.

The Power of 12
Every trader is different. You are a different trader than I am and we are both different than the person who will read this piece next. So are the traders in this book. And in that lies its power as a trading tool. Because every writer brings a different viewpoint to each topic, there will almost always be a viewpoint that will be similar to your trading style and others that may be different but force you to look at things in a different way. If you were to pick up a single book on trading and read it, you may have found “the” trader for you. Odds are however, some of what they say will work for you but some will not. You will need to keep reading until you get the whole picture. Trading FAQ’s is like 12 books in one.

Like a bucket of cold water
Sometimes the traders are a bit blunt. But lets face it, if they were all rosy telling you that trading was easy and that everyone should do it tomorrow, they would be lying. Every one of these traders has earned their stripes and knows how hard it is to do this for a living. They want, no need you to understand that. They are not trying to talk you out of trading. They are letting you convince yourself you can. With different styles, markets and experiences, you are left with a whole list of questions to ask yourself about whether you can be a trader. Can I follow my trading strategy in up and down markets? Have I made my Risk of Ruin 0%? Do I fully understand the market I am trading? Am I the kind of person who can and will put in the time needed to learn how to do this properly? There are enough questions you will need to ask yourself before you have completed this book that if you are not convinced it is for you, it probably isn’t!

Tools, Tools, Tools
If you read this book and find a trader or three that speak to you and convince yourself that you want to take the next step then you have also come across many of the tools you will need to be successful. Additional reading – There are many references to tomes that will help you be a better trader on topics from technical analysis to the psychological aspects of trading. Methods and models – the traders share their thoughts on how to build your trading method and where to find tools to help you test it. Practice – How to do it right including a very novel way to make sure you do it and do it right.

Something for everyone
I once was introduced to a theory on why traders burn out and a big part of the theory relates to them being unable to adjust to a “new normal” to use an over used term. Basically it means that once a trader stops learning, they stop trading. As I noted before, there is over 150 years of trading experience in this book and even an experienced trader would be able to find a few nuggets to help them be a better trader. Whether it is a return to basics or just a different way of thinking about a particular idea, I predict you will be a better trader after reading this book.

Reader Questions Answered Trading Tips

Computer Requirements for Traders

There comes up from time to time the question of the type of computer hardware and software traders need to have. The following inquiry that came in by email the other day is along those lines.

I need to get a couple of new computers, one main workstation and a laptop. I had hoped on buying new computers when I had my business plan fully developed and had a much clearer picture of what was required. I realize that no computer is going to make me a great trader, but I assume than a typical PC is needed.

Do traders really need the high performance computer hardware with multi-monitors?

Just for fun to make some of you jealous, let me describe my set-up at work.

System SpecsAs you can see from the left, my work PC isn’t exactly the latest and greatest. My machine at home is significantly more powerful. I don’t expect you to be envious about the machine specs.

Here’s where you may start to hate me, though. 🙂

I have four monitors. Yes, I said four. Yes, it’s a lot of monitors, but here’s why I need them.

I’m running Reuters 3000 Xtra (that’s the full desktop application) in one screen, MetaStock Professional in another screen, and Sierra Chart on a third (for price distribution charting). With those three screens I keep track of the forex, fixed income, stock, and commodity markets to a greater or lesser degree depending on circumstances – and news, of course.

The fourth monitor is my main working one where I have my email, IM applications, web browsers, spreadsheets, and authoring tools – as required.

I have all this stuff going because I’m working on a real-time intraday focused service. I need to know what’s going on pretty much all the time. While my main focus is forex, I keep track of everything else because of the cross-market implications. It all ends up in my commentary and analysis at some point or another.

Now most likely you won’t need all the stuff I use. If you are not a very short-term trader who needs to follow things in real-time very closely you won’t really need more than a basic computer with a single monitor and a decent internet connection. Even if you’re a day trader tracking several things at once, it’s probably more about screen space that about a super fast computer, unless you’re running some high intensity data and computational applications.

The best approach for deciding on a computer is actually first to decide what you intend to use for applications. They will define your minimum requirements. You can then go from there based on your budget and other needs. Just realize that only the most active traders among us need to really worry about their computer set-ups beyond generally keeping from falling too far behind the latest developments.

All this said, I don’t claim any specific expertise in this area, so I encourage those with specific experience or know-how to contribute their thoughts by leaving a comment.

Trading Book Reviews

Book Review: Financial Shock, by Mark Zandi

[easyazon-link asin=”0137142900″][/easyazon-link]Over the last couple of weeks I read Mark Zandi’s new book, [easyazon-link asin=”0137142900″]Financial Shock A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis[/easyazon-link]. It’s one I was offered the opportunity to get my hands on for free and the subject interested me, so I grabbed it. Overall, I have to say it was a good choice.

Financial Shock is a look back at the things which put us in the market and economic situation we’re in right now vis-a-vis the mortgage and credit markets. Unlike the media, political voices, or the general public - most of which seems to be placing the blame almost exclusively on Wall Street and/or the Bush administration - the author, economist Mark Zandi (you may have seen him on CNBC and/or other business news outlets), does a good job of showing how a many different elements played their part. They include regulators at all levels, home builders, investors, home buyers, the Federal Reserve, the government, financial institutions, and others. To put it simply, the book does an excellent job of showing how large and complex an issue the development of the mortgage crisis really was.

Actually, Zandi does leave one group out of the discussion. It’s the rating agencies, which have been reviled for their role in developments. While this means that a large cog in the machine is missing from examination, there’s a reason why they were excluded. Zandi is in the employ of one of those agencies – Moody’s. While it would have been a better text were the agencies included, it’s hard to argue against the author taking on that subject. It was a no-win situation for him.

Breadth of coverage aside, I found the book very well written. It does an excellent job of explaining the many complex elements of the story, things like the array of alphabet soup derivative instruments and regulatory agencies involved. As you are probably aware, I work in the financial markets, so I know from what I speak here. There are plenty of statistics and graphs for readers who get into the data, but I wouldn’t call it a challenging quantitative read by any means. The subject Zandi tackles here is a big, heavily intertwined one and he did a very good job of showing how things all came together to create the so-called housing bubble and how it burst.

Here’s where the book runs into trouble, though.

It was written too early. Things have not run their course and been resolved as yet. The author put the book together some time not too long after Bear Stearns was taken over by JP Morgan. As we all know, a great deal has happened since then. That means Zandi has only told part of the story.

He also basically made a prognostication in the book that the crisis was at an end. It’s not going to help his credibility to readers that he obviously got that one wrong. Clearly, he and his publisher were trying to be the first to market with a book on the subject, but they’re getting a bit burned by rushing it.

The other thing I think diminishes the over all value of the book is that in the end Zandi makes suggestions for things that could/should be done. In other words, he moves from history to policy adviser. I think he would have been better off just sticking with the history – at least in this particular product. He’s presented an excellent discussion of how we got here. I have no problem with some commentary on how things could have been handled differently, but I’d rather see the forward looking stuff handled separately.

Overall, however, I found [easyazon-link asin=”0137142900″]Financial Shock[/easyazon-link] a very worthwhile read, and would recommend it for anyone with an interest in the subject.

Trader Resources

Brett Steenbarger’s New Book Project

Brett Steenbarger is amazing! I really mean that. The sheer volume of writing the guy does blows my mind. And he’s doing it again. Along with his normal blog posting, Twittering, articles, and other stuff (not to forget his trading), he’s also working on yet another new book. The focus of the new book is becoming your own trading coach, a subject he’s been really concentrated on for some time now. He’s started a new blog to track his progress. You can find it here.

Of course Brett’s two existing books are books, The Psychology of Trading and Enhancing Trader Performance, are highly recommended.

I feel compelled to provide full disclosure that Brett wrote the forward to my own book, The Essentials of Trading. That in no way shades my view of his work, though.

Trading Book Reviews

Book Review: The (Mis)Behavior of Markets

[easyazon-link asin=”0465043577″]The (Mis)Behavior of Markets[/easyazon-link]I’ve been reading a pretty interesting book over the last few weeks. It’s [easyazon-link asin=”0465043577″]The (Mis)Behavior of Markets[/easyazon-link], by Benoit Mandelbrot. The author is probably best known for his work with fractals, but has been researching financial markets on and off since the 1960s. I picked up the hard copy edition during a bargain book sale after the holidays using one of the several gift cards I received, and have been reading it on my commute.

First, a warning. This is not a book that’s going to teach you how to predict the markets. If you’re looking for that kind of book, look elsewhere. In fact, if you’re looking to learn about trading or investing in the markets, this is probably not a good book for you. This is not an overly practical book in terms of providing any methods or techniques for use in your day to day trading.

The (Mis)Behavior of Markets is much more along the lines of a scholarly discussion of prices. For those with a desire to understand how prices move, this is a good book. In particular, it’s great for understanding why it is that even the supposedly best and brightest (like Long-Term Capital Management – LTCM) could get it so wrong. In short, much of what university economics and finance departments have been teaching for years is at best misleading and at worst dangerous.

I must state for the record that I have long held a less than agreeable view toward efficient market theory, Black-Scholes, random walk, and all of that stuff. It goes back to my days as an undergraduate finance student when I just intuitively didn’t believe what I was being told and often saw the major flaws. When I started working in the markets I saw first hand how ridiculous many of the underlying assumptions behind classic financial theory really are. In The Essentials of Trading I presented some of the basic ideas, but also indicated what I saw were the major issues.

In The (Mis)Behavior of Markets, Mandebrot takes on classic financial theory in a very straightforward manner. He is extremely critical of the way economic (and by extension financial) theory has been developed and moved forward. He spends a fair amount of time explaining how the now classic theories of price movements came about, which I found interesting since I’m a bit of a history buff.

From what I understand, many of the things that I used to gripe about with my professors as being major flaws in classic finance have finally been recognized in recent years by academia as just that. This from a professor friend of mine. I don’t know whether or not things have changed in what’s being taught, though. My impression is not so much, which to me seems a major disservice.

The thing I found most interesting in the book was how all these theories have been torn apart, not just recently, but for decades. Mandelbrot and others figured out very early on that price changes do not conform to a normal bell shaped distribution. They also figured out that price changes are not independent. Those are two major capstones underlying efficient market and random walk theories and the pricing of options using Black-Scholes.

The thing that really irks me is that none of these critiques were ever presented to me in the classroom. We were just taught the same stuff that had been taught for years and years with no perspective on how research was showing major problems.

The biggest thing Mandelbrot focuses on in terms of the implications of all the erroneous assumptions is the implied risk. He points out that things like the Crash in 1987 should literally never have happened according to classic theory, and that other market shocks in recent years were also so improbable as to be beyond the reasonable expectation of classical theory. Given how many securities are priced using models based on that classical foundation, and how the commonly employed Value at Risk (VAR) calculations are similarly based, you can see how this is a major problem. Investors and institutions have been taking much more risk than they thought. This is something which once again became readily apparent last summer as the credit crises exploded.

Mandlebrot, naturally, presents a different way of looking at price movement – one founded in his fractal theories. He readily admits, however, that it is still early in its development. Much more work and research needs to be done. One cannot use anything he presents in the book to help forecast prices, though it can help to understand better how prices move, and thus by extension the risk of financial assets, which is a benefit of potentially enormous value on its own.

All in all, I would call [easyazon-link asin=”0465043577″]The (Mis)Behavior of Markets[/easyazon-link] a good read. It’s informative and thought provoking, but doesn’t bog the reader down in a great deal of math and complexity (there’s an appendix for those inclined in that direction). If you are at all intellectually curious about the financial markets, this is definitely a book worth reading.

Trader Resources

What Trading Resources are Your Favorites?

What resources do you use in your trading? By that I mean what do you use to help your trade decision-making process? I’m including things like information sources (websites, newspapers, blogs, etc.), charting packages and data sources, screeners/scanners, advisory services, or anything else that falls into the resources category.

To get things started, I’ll share the things that I use on a regular basis. Granted, I do this for a job. They include:

What about you? Let me (and your peers) know what your find useful for your trading.

Reader Questions Answered

Good, Free Trading Resources

Today’s trader question is in regards to trading resources:

I am just trying to be involved in FX trading. And I shall sincerely appreciate any help you can render, in terms of genuie and good free resources.

Over the years I’ve been exposed to a great many trading resources of all different types. That includes information and tools for use in the trade decision making process and items focused on educating traders and investors. I try to post regular reviews of books and other things here to provide my thoughts on the ones I come across.

The questioner in this case brings up a very interesting subject – that of free resources.

I have written on this subject before in the post When Free Isn’t and Paying Makes Much More Sense. There are certainly many free resources out there. To my mind discussion boards like Trade2Win and BabyPips are great sources for new traders. Not only do they provide information, but they also allow traders to ask specific questions. You can’t do that to a free ebook.

The question is one of value, though. The old saying “You get what you pay for” holds true in trading resources as it does in everything else. Keep very much in mind that there is a reason things are free. The most common one is that they provide only general information. Another is that the creator put the resource together relatively quickly without spending much time on making it a really good presentation.

Consider this. Are you likely to give away something you spent weeks or months of your precious spare time putting together? Probably not. If you only put in a couple of hours, though, you’d likely be more inclined to do so.

Also, what you get out of something must come into consideration when determining what you pay for it. Businessess understand this very well. If I can spend $100 on something that’s going to make me $200 in profits, or save me $200 in expenses, I’m most certainly going to do that.

I work on a analytic service which has a price tag of about $300/month per user. That might sound like an a lot of money, but think about it for a minute. If what my colleagues and I present to you makes you $1000/month in net profits, doesn’t that $300 sound extremely reasonable? The guy I consider my markets mentor runs a service with a monthly price tag of $1000+. The institutional customers who subscribe to his service happily pay that because they know they can use what he tells them to affect much bigger improvements in their returns.

There’s the difference between institutional/professional traders and individuals. The former understand they are investing their money with the expectation of a positive return. The latter think instead of cost and expense without considering the value of what they receive in return.

If you find yourself thinking about a book, or data feed, or trading tool, or whatever as an expense, then change your thinking. I’m not saying you should spend more than you can afford, but prudent investments can really the make a great deal of difference in your development and performance.