Trader Resources

Video Review: Wall Street – Money Never Sleeps

Over the weekend I finally got around to watching Wall Street – Money Never Sleeps, the sequel to Wall Street. The latter is widely considered a classic. I’m confident the sequel won’t be viewed in the same light 20 years from now, unfortunately. I’m not saying it’s a bad film in general terms. It just doesn’t live up to the original and lacks some creativity.

The thing I came away from Money Never Sleeps thinking was that it lacked the edge of the original. Shia Labeouf does not have anywhere near the same kind of screen presence as Charlie Sheen did (Bud Fox makes a brief appearance in the sequel, by the way), leaving the direct inter-personal conflicts which feature in the story – verbal as they may be – less impactful. And the lack of one strong antagonist character (Michael Douglas’s Gordon Gekko sometimes is one, sometimes isn’t) tends to diffuse the tension.

In terms of the story, if you’ve read much about the history of the financial crisis – especially On the Brink, by Hank Paulson – you will see a very strong similarity in the early parts of Money Never Sleeps. There’s also a firm that is portrayed very much in the way Goldman Sachs was portrayed in recent years. To top it all off, Gekko has very John Paulson-like success in the markets.

I do think the new film does a pretty good job reflecting how information moves around these days. Blogs, instant messaging, and the like feature along side the traditional phone and in-person interaction. Overall, though, I’d give it a middling rating. Gekko’s semi-reformed character is the only one that’s really interesting and the story is flat and somewhat disjointed.

Make sure to check out all my trading book reviews.

Trader Resources

I’m Floored by Amazing Feedback for the Trading FAQ

I received a pair of emails yesterday from readers of my new Trading FAQ book that blew me away. Let me share them with you. Here’s the first one.

I’ve only read chapters 1 to 4 and I must say it is one of the best if not the best work I’ve read on trading, its honest and provides years of experience to the reader. I’ve only been trading a few years, managed to keep my original capital, luckily, and I wish I read something like this years ago.

Wow! The best, or at least close to it? It’s hard not to be happy with that kind of response. The “honest” and “years of experience” parts are exactly what I was going for, so it’s good to hear that’s what’s coming across to the readers.

Here’s the one that really hit me, though:

For me it’s kind of a Market Wizards lite in the sense of getting to see how traders THINK and organize things in their heads.

Anyone who’s been following my writings and trading educational efforts for any period of time knows how highly I rate Jack Schwager’s Market Wizards books (which also includes The New Market Wizards). I always recommend them to new – and even not-so-new – traders when the topic of trading books comes up. Someone equating the FAQs book with Market Wizards, even just a little bit, is amazing to me. I consider it very high praise and it makes me blush. 🙂

I actually got to meet with and interview Jack Schwager back in 1992, shortly after the first Wizards book was published. I can’t imagine he had any idea how big it would become when he wrote the book. If my FAQ has even a tenth the impact Jack’s books have had, I will be a very satisfied author and educator.

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.

News & Updates

Responding to a review of The Essentials of Trading from a book reader

Someone posted a new review of The Essentials of Trading on Amazon which has the title “Covers the bare bones. There’s no meat at all”. I actually know who it was, as the individual emailed me. This is the first negative review I’ve seen to-date. So far they have all been excellent, but when you have a book read by thousands of people it’s inevitable that there are going to be those who don’t like it for one reason or another. I accept that fact and the criticism.

That said, I do want to address the reader’s arguments as there are points where I believe the book has been unfairly criticized (and others where it’s reasonable). To that end, I am posting the review here (italics) with my counter points.

I purchased this book for the purpose of learning more about stock trading. While the author suggests that his text is just as applicable to stocks, his entire focus is on currency (forex) trading. He spends a great deal of the book explaining the software of his favorite forex game platform (which turns out to be irrelevant during the remainder of the text). I can only assume that Oanda subsidized his book. I would not have purchased this book had I known that.

To address the latter point about Oanda subsidizing the book, the reader clearly did not pay close attention. On page 11 there is a point where I specifically state that while I have long used their forex platform both personally and in my educational efforts, I have no beneficial relationship with them, nor have I ever had. Which isn’t to say I wouldn’t mind having one at some point. 🙂

Moving back to the part about the focus being only on forex, this is something I’ve heard before, and I can understand why that might appear to be the case. Especially in the early part of the book where trading basics are the main focus, forex is the market featured. There’s a very simple and specific reason for that. Forex trades 24 hours a day.

I developed The Essentials of Trading based on my experience teaching trading in the college classroom. These were evening classes. The stock market was closed. The futures market – including stock index futures – is not sufficiently active many evenings to provide sufficient price movement for teaching purposes. It’s about giving people the opportunity to practice in a real-time, active price movement environment. The forex market is the best vehicle for that.

After getting the reader working on understanding price movements, orders, profit/loss, and all those basics, the focus shifts away from forex. The sections on what moves prices and market analysis are general. They incorporate all of the major markets in the discussion.

In terms of the forex platform being irrelevant during the remainder of the text, that is completely untrue since it most definitely features when I get into the system development and testing area. I did that to allow the reader to once again practice on a platform with which they were already familiar.

While I am glad to know a bit more about forex trading, some of the “logic” behind doing so is faulty in my opinion. One of the premises behind trading currency is the much smaller set of investment vehicles to analyze as opposed to the thousands of stocks available. The trouble with this premise is that one currency in and of itself takes an entire economy to create its value as opposed to a stock which is a microcosm of one sector of an economy. What you end up trading with forex is not just one economy but TWO! To trade the currencies effectively, one should know what’s driving the value of both entire economies. The scope of your fundamental analysis is therefore not more limited, but dynamically multiplied.

Cannot disagree with that at all. Fundamental analysis of the forex market is very complex because you are trading a relationship between two currencies. Of course technical analysis and quantitative analysis are also possible methods for forex trading.

However, that being said, this book only covers the most basic concepts of trading, and in very broad generalities. He gives practical “homework” assignments, such as track market reactions to economic releases, keep a journal, write down your goals, define your strategy, stick to your strategy, don’t drink and trade.

All true. This is a basic, foundational book. The don’t drink part, wasn’t mine, though. It was a quote from a trader on the Trade2Win forum.

Where this book falls grossly short, for me, is in the details of his “methods”. The subtitle is “From the Basics to Building a Winning Strategy”. This should be interpreted as reaching only to the upper resistance area of the Basics. The window left between the Basics and the theoretical Winning Strategy is quite large. There is NO bullish breakout into the Winning Strategy trading area.

Nice use of market related phraseology. 🙂

I’m not entirely sure what was expected in terms of sharing my “methods”. If the reader went in to the book expecting that I was going to lay out a specific technique for trading the markets, they were well off base. The book is in no way intended to do that and I made very sure that it was not advertised by my publisher as doing anything of the sort (though it does present a pretty specific stock trading methodology in an appendix by way of a fully realized trading plan of action).

He basically says, “go create a strategy”, then “test your strategy”. Then says, “choose a strategy” without a single word of advice as to how to do that with any reasonable or practical sensibility. There is no discussion of the multitude of components that might make up a strategy other than “there’s other books written on the subject”. His homework assignment in this one area would leave the book on the shelf for years while you figure it all out yourself.

The three chapters which cover systems development, testing, and evaluation are intended to outline what a trading system is and how to judge one. Obviously, to develop and test a system one must first have something to be the basis for that system. Only the individual can decide what that basis is. The process of doing so is addressed in the middle part of the book where the discussion involves determining how one takes on the market. Which market? Which instrument(s)? What timeframe? Technical? Fundamental? Quantitative? Value or momentum? Trend or range? There are a lot of questions the individual needs to answer before the system comes in to play.

The reviewer uses the term “multitude of components”, and that is extremely appropriate. There are so many possibilities for ways to trade, what to trade, when to trade, and how to do it that no book could possibly cover even most of them in a reasonable fashion. My intention with The Essentials of Trading was to introduce the basic roots and categories, but it is up to the individual to pick the best for them and pursue more detailed research in that area.

He provides a few basic testing examples, but emphasizes that they were created for the purpose of walking through a fictitious test and are not intended to provide any usable results. There’s no list of things that might be testable, what indicators are available, or what variables to use, what formulas to use or how to apply any of his suggestions to the wide expanse of reality. Speaking of formulas, he throws out a great deal of quantitative results, but doesn’t provide the math used to back it up. This is akin to saying, “X=10, please go test for X, and make your choices based on the results.” I’m just supposed to grab these formulas out of thin air I suppose?

Without knowing specifically to what the reviewer is speaking, I can’t really address this critique. I didn’t include much in the way of complex math or quantitative methods, so I’m not really sure what the issue is here. 

The few formulas that he does provide are either basic math (sell price minus purchase price equals profit), or include variables that aren’t explained at all (i.e. R sub f = risk free rate of return). If you don’t know what Risk Free Rate of Return is, don’t worry neither do I and I’ve read the book.

The Risk Free Rate is generally considered the yield on US Treasury securities of the time span in question. That said, right after introducing it in the text as part of the formula for the Sharpe Ratio I tossed it out for the sake of simplicity since essentially it’s a meaningless thing for the trader. It’s never used again. 

He doesn’t point you in any direction whatsoever! There’s a big world out there, go invent your tests and your formulas yourself, then test all the possibilities before using real money to trade. While at the same time says that it’s unreasonable for a novice to understand more than one trend indicator at a time. I’m sorry, that’s just not practical advice. If I can only understand one indicator, at least point me in a somewhat limited direction and explain it to me.

The reviewer here seems to make the assumption that everyone who reads The Essentials of Trading is going to follow a path toward technical analysis. At least that’s the impression I get from the discussion of indicators. In writing the book, however, I did no such thing. I knew that some folks would go toward fundamentals, others technicals, and still others quantitative methods. There are excellent books on all those subjects. I couldn’t possibly go into any real depth in any of those subjects. The objective of the book was to introduce them so the reader could make her/his own decisions.

He also does not give any advice as to how to find a broker, just says “find one that suits your goals”. What?! Mind telling me how to do that? Never once mentions how to research their credentials, or what scams might await. How are they regulated (or not)? What should you look for as a reasonable spread? Are there hidden fees to consider? What about those bogus interest rate rules some brokers have? And absolutely nothing he suggested actually related to stocks or stock brokers at all as far as I’m concerned.

Actually, my advice in regards to brokers was to make use of sites like Trade2Win where there are extensive discussions of various brokers in all different markets. That said, the book probably could have done with a more thorough discussion of brokers. That’s definitely something I’ll have in mind for a future revised edition.

Many of his charts are illegible, or incomprehensible due to lack of explanation as to what he’s charted. There are many grammatical and sentence structure errors which make portions of this text difficult to get through. His overview of the technical indicators is slack at best. He merely suggests that “there are many books that already cover that topic in great detail”. In fact he makes similar statements on various topics throughout the book.

I will absolutely agree on the charts. When I originally put the book together I was doing so in a normal 8.5×11 page format. It wasn’t until Brett Steenbarger got me hooked up with Wiley that things changed. Personally, I don’t care much for the way Wiley formats its trading books. They are quite unattractive in layout.

As for the book’s overview of technicals being slack, of course it is. John Murphy’s book Technical Analysis of the Financial Markets is widely considered the best book on the subject. That book runs 500+ pages. There’s no way I could possibly cover a subject with that much depth in any but the most introductory way in a book which was developed to be basic and foundational.

The most amazing thing is that he spends the entirety of the book explaining trading via forex. But then the trading system he shares with you in the appendix is for stocks! And not only that, the system presented completely digresses from his proposal to pick one or two trading vehicles and thoroughly back test them to develop the optimum system for that vehicle. It is the ultimate in inconsistency! Due to the number of errors in the book, there’s no way I’d trust his “sample system” at the end of the book without confirming it against several other sources.

First off all, the reviewer suggests that there are a number of errors in the book, but hasn’t actually pointed them out. Not really sure what can be done with that.

Second, as noted earlier, I included the stock method as an example of a full formed trading plan and strategy. I really don’t know how that contradicts anything. As I’ve already said, I used forex a lot in the book for specific trading elements so they could be readily replicated and practiced. At no point, though, did I say not to trade stocks, or endorse any particular market. I don’t consider trading different individual stocks to violate the idea of focusing on relatively few vehicles, and the system I use is one I’ve tested considerably over the years.

And one should absolutely never trade a system without doing your own testing of it.

If you need someone to tell you that you need to do your homework, apply yourself to ongoing research, and plan properly prior to trading then I’ve just done that. No need to buy the book.

However, if you’re looking for practical advice on how to find workable tools, strategy evaluation methods, or any caveats to watch out for which are prevalent in the industry, I suggest that you seek to purchase one of those other books that he alluded to.

The subtitle really should be “From the Basics and up to (but not including) Building a Winning Strategy”.

My basic feeling from this review is that the reader:

1) Already has experience in and/or experience of the market. This is suggested by the phrase in their first sentense “purpose of learning more about stock trading”. This book is not specfic to stock trading, so a reader who knows that’s what they want to trade should look for a book which covers that subject directly. The same is true of any other specific market or technique.

2) They were expecting something more from the book than it was designed to present. The talk about not being provided with a specific method or indicators indicates as much. As I’ve said, this book is foundational. It was not written to present the reader with anything like “use this system to make money”. I’ll let others sell that kind of book to folks who in most cases will never make any meaningful money using said system.

3) What I consider the most important part of the book was essentially skipped. The middle third of the book talks at length about what it takes to develop a strong trading base. This is by far the biggest problem I see with new or relatively new traders. They just jump into the deep end of the pool without learning how to do anything more than tread water. The reader makes absolutely no mention of the sections of the book on developing a strong trading plan or risk management. Everything else was attacked in one fashion or another. Why not those areas?

Like I said before, I accept that not everyone is going to find the book useful. It wasn’t written for everyone. I also agree that there are things which could have been done better. If I were writing it now I would change some things based on the experience I’ve gained working with traders over the last three years since I wrote the book.

They wouldn’t be huge changes, though. I continue to believe that The Essentials of Trading does what I intended it to do, and does it pretty well. The fact that so many folks have had such good things to say about it tells me the vast majority of readers find it very useful.

Trading Book Reviews

Book Review: How I Made $2,000,000 In The Stock Market

[easyazon-link asin=”9562914534″][/easyazon-link]This week the book I read during my commute was [easyazon-link asin=”9562914534″]How I Made $2,000,000 In The Stock Market[/easyazon-link], by Nicolas Darvas. It’s a trading text I’ve been aware of some time, primarily through the discussions of and recommendations by others, but I’d never gotten around to reading it myself. After Christmas I took advantage of some gift cards and discount sales to pick up a copy so I could give it a read and provide a review.

First, be aware that this book – at least in the version I have – is quite short. It’s only a bit over 100 pages, and a healthy portion of that is editorial addition tagged on to help further explain the author’s story, along with some Q&A with Darvas tossed in. You should easily be able to get through it in one sitting.

Second, this book – again, at least the edition I have read – was very poorly copy edited. There are formatting issues all over the place. It’s not necessarily the easiest book in the world to read to start with, as the author’s narrative leaves something to be desired. The formatting issues, don’t help make for a particularly enjoyable reading experience.

Thirdly, you will note that I have used “story” and “narrative” in describing the text. That’s exactly what it is. Nicolas Darvas was a professional dancer who performed all around the world. The book describes how he somewhat randomly got into the stock market, and then the progression he made to building a $2 million portfolio for himself. All of it takes place during the 1950s, so be prepared for the author to talk about cables and things that modern readers will have little to no point of reference on.

At it’s core, How I Made $2,000,000 In The Stock Market is a trading diary of sorts. The bulk of the book is a discussion of the various trades the author made over about a 6 year time frame. Some readers will find that interesting, others will yawn. But that’s not what you read this book for, fortunately.

It is the developmental path Darvas takes from newbie to multimillion dollar trader – which the author interweaves with the discussion of trades - that is the read value to be had from How I Made $2,000,000 In The Stock Market. Anyone who has gone through that developmental process as a market participant will immediately be able to relate, and those who haven’t yet (or are just starting to do so) will see that even wildly successful traders went through their struggles.

In parallel with the author’s discussion of his personal trading development is also the construction and refinement of his trading strategy. As is the case with most traders, he started on one path, but shifted course several times until he finally found the methodology which suited him best.

Darvas employed a combined fundamental and technical approach which is the core of the popular CANSLIM methodology outlined in How to Make Money in Stocks. It’s not an exact thing in terms of application, as Darvas developed an entry/exit strategy based on what he called boxes, but a great deal of the preliminary set-up elements are very, very close. That philosophy is definitely something that works. I can personally attest to it myself, though I have never employed Darvas Boxes or anything like that.

The issue a reader might have, though, is that the outlining of this methodology isn’t concisely presented. Rather, it’s spread out over the course of the narrative, presented in bits and pieces over the timeline as Darvas refined his approach to trading. It would probably take a couple of readings to really get a handle on things.

Overall, I definitely think there’s value to be had in [easyazon-link asin=”9562914534″]How I Made $2,000,000 In The Stock Market[/easyazon-link]. If nothing else, it proves that part-time trading can be extremely rewarding. As I commented above, it’s not a great read as books go, but there are quite a few good nuggets in the text if you can fight through.

Darvas must have enjoyed the notoriety he developed because he authored a couple of other books as well. If it get the opportunity, I might give them a read down the road.

[easyazon-image-link asin=”9562916006″ alt=”Darvas System for Over the Counter Profits” src=”” align=”none” width=”107″ height=”160″] [easyazon-image-link asin=”0818403985″ alt=”Wall Street The Other Las Vegas” src=”” align=”none” width=”107″ height=”160″]

Trading Book Reviews

Book Review: The Age of Fallibility by George Soros

[easyazon-link asin=”B000PFUCS0″][/easyazon-link]I just got finishing George Soros’ latest book, [easyazon-link asin=”B000PFUCS0″]The Age of Fallibility: Consequences of the War on Terror[/easyazon-link]. Thanks to my brother for the holiday gift. It’s been my commute reading on the subway to work for the last couple of weeks, and I’ve found it quite enjoyable in that regard – making the trip go by a little bit more quickly (not that I have a terribly long ride, mind you).

First of all, it must be said right off that this is not a book about trading. Soros is most famous in the financial markets for his managing of the Quantum Fund and making a billion shorting the Pound in the 90s when the currency broke from the Exchange Rate Mechanism (ERM) which was in place then as a precursor to the eventual Euro introduction. While he does mention events like this and others for which he is famous – or notorious, depending on your viewpoint – neither trading nor the markets are the focus of this book.

The Age of Fallibility is at its core as much a philosophical treatise as an exploration of global affairs. Soros has a pretty well developed world view and philosophy. His ‘reflexivity’ approach to events (markets and otherwise) has been expressed in his earlier books, and is further refined in this one. That is the part of the book which will appeal to traders and investors, as it helps to explain how he looks at the larger movement of markets and how predictable patterns of behavior can be seen. For those who like to take a big picture view of things, it is definitely something worth reading.

As for the remainder of the book, that is a combination of explaining open society, exploring global politics, and attacking America’s foreign policy, as the title would imply (though no major global player is left out of the discussion or immune from criticism). If you are an open-minded sort then you will find Soros’ views very interesting. In particular, I found his discussion on the concept of the “war on terror” very interesting.

No matter what you think of Soros or his politics (and many folks rightly or wrongly have a negative view of him), the fact of the matter is the man has a perspective on things few can offer based on his experience operating his various organizations. As such he is definitely someone to whom we should at least listen. If you can do that, I guarantee he’ll have you thinking at several points in the text. If not, then this may not be a book you’ll want to read.

I personally started the book wondering if the arrogance I found in his earlier market focused books would be apparent in this one too, but I found it wasn’t. The style was very engaging throughout and what he had to say thought provoking. If that’s what you look for in a current events type of book, then you will like this one, all the more for the fact that though the book was written in 2006, it has enough of a macro scope to it to make the subject matter still quite meaningful now in 2008.