The Essentials of Trading

Information and resources to learn about trading and the markets

Top Trading Reads from 2011

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In case you have an Amazon or Barnes & Noble gift card burning a hole in your pocket, here’s a list of potential purchases. These are the books readers of this blog bought most frequently in the last year.

Make sure to check out all my trading book reviews.

Book Review: Trade the Trader

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Going through Trade the Trader by Quint Tatro I couldn’t help but think the author must have read my own book, or at least has been following my blogging over the years. So much of the advice Tatro offers up is exactly the sort of stuff I’ve been talking about and writing about for the last several years. I couldn’t help but chuckle at times at how the author was saying things in a very similar fashion to how I would have done. 🙂

The basic philosophy underlying Trade the Trader is that applying basic technical analysis methods is no longer sufficient. The author suggests that traders need to take a second level view of things and learn to anticipate what those traders using basic methods will be doing in the market and positioning accordingly to take advantage. This bit of philosophy is definitely interesting and worthwhile of itself, but the book doesn’t actually spend all that much time on that subject.

This is not to suggest the book isn’t a good and useful one, just that the title probably doesn’t best reflect its contents.

So what does the book focus on, if not trading the trader? Well, just about everything else, actually.

Tatro covers just about all the high points in individual trading. He has chapters discussing time frames, entry and exit rules, risk management, trading plans, and trader psychology. Mostly it focuses on things in terms of his own particular style, which is largely basic chart and trend oriented (no indicators). There are numerous examples and stories scattered through the text to help reinforce the points he’s making. This is a stock trading oriented discussion, but most of it can be applied to other markets as well, so non-stock traders should not be dissuaded.

My one little gripe with the book is that the author could have used more sectioning in the text, and maybe the latter part of the book could have been structured differently, but it’s a minor thing. The chapters are fairly short, making the book convenient to read in small chunks, as I was doing during my daily commute. Also, the author’s writing style is pleasant and easy to follow. At just about 200 pages, it’s also not particularly long to begin with. Overall, I found it a good read and would consider it well worth going through for developing traders.

Make sure to check out all my trading book reviews.

Book Review: Trading on Corporate Earnings News

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If you’re a stock market trader I think you’ll want to pick up a copy of Trading on Corporate Earnings News 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.

Book Review: Profiting With Condor Options

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The latest trading book I’ve finished going through is Profiting With Condor Options by Michael Benklifa. The author’s bio indicates he “manages millions of dollars worth of condor trades every month for private investors”. I opted to give this one a read because condors have become a common strategy talking point, at least among the websites and blogs I pay attention to on a daily basis. I’ve never traded condors myself, so I figured maybe this would be a good introduction to this options trading approach. I’m conflicted as to whether I want to recommend this book, though.

My first problem with this book is that I couldn’t actually find a definition of what a condor is in the text. I was about half-way through the text when this occurred to me and I flipped back through the earlier pages thinking I must have missed it, but to no avail. There are examples of condors, of course, and from that you can deduce what a condor option spread is, but I never saw it properly defined, which is something you’d think should be a feature of a book like this – one which takes a fair number of pages to talk about option basics.

The other problem I have with the book is that it’s rambling. The author covers a lot of ground, but does so in a rather meandering way. The text is kind of disorganized. I don’t mean the overall structure of the material in terms of content progression. That’s generally fine. I’m referring more to the actual writing, which could have done with some editing to produce a tighter and more focused end project. Instead it’s something that can be challenging to follow at times.

Now, I will say that author does provide a very specific set of rules for trading condors. This is mainly for SPX index options because of their liquidity and tight spreads, but he also talks about individual stock options late in the book when he spends a bit of time addressing day trading. This is probably the part of the book that will be of benefit to most readers, whether they actually use the outlined strategy or not.

I guess the bottom line is that I’m not inclined to recommend this as a strictly educational book for someone totally unfamiliar with the subject. For those looking to get ideas how they could apply condors to their trading, however, there’s probably some value to be had.

Make sure to check out all my trading book reviews.

My Tools of the Trade

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Trader Mike and Blain at StockToGo both posted recently on the various tools they use in their trading. I know I’ve talked about this before, but I figured it was worth revisiting the subject. Seeing as I work for one of the biggest information companies in the world (Thomson Reuters), I have access to all kinds of stuff. The jealousy factor among my peers is quite high. 🙂

At Work
For my daily work as a forex analyst I have four monitors running from one CPU. One of displays Thomson One, with which I keep track of the equity markets. Another screen has Reuters 3000 Xtra (haven’t updated yet to Eikon). That’s my primary data and news workhorse application. I’m mainly a technician, but I cannot ignore the fundamental side of things as I have to write about that as well. On a 3rd screen I have a version of MetaStock Professional to use some custom indicators, run the occasional screener or test, etc. My fourth monitor is my working screen, of course.

Among the other tools of my trade during the work day are Reuters Messenger (we’ve got Compliance limits on what IM apps we can use) for quick contact with colleagues and contacts, Feedly to keep track of a long list of blogs and news sites, and SnagIt for grabbing and editing charts and other graphics. All of our content creation and editing is web-based, for which I generally use Firefox. I also use Excel a fair bit, in many cases bringing data in (live and/or EOD) from Reuters or MetaStock (which is really the same data), either as a drag-and-drop or through a special plug-in. Seeing as I have a very geeky research-oriented side, Having access to all this data is very cool. 🙂

My own trading
In my work I have to follow the markets in real time and know what’s going on across the board all the time. For my own trading my needs are much, much less. In fact, I can generally get all the information I need from free and/or low cost sources, and I don’t need anything special on the computing side beyond a relatively modern machine and a high speed internet connection.

I have always done my stock and option trading with Charles Schwab (I may think about changing that this year), and have had plenty of access to information, screeners, and all the stuff I use in my equity market trading through their website and other tools. My other primary trading focus is forex, and for that I use Oanda’s fx Trade platform. The commonly expressed complaint about the Oanda platform is the lack of charting tools, but it’s got more than enough for my purposes as I don’t really need much more than a price chart. The one drawback for me is the lack of chart time frames above daily.

There are only three data/charting packages I have ever paid to use. One is Daily Graphs. Readers of The Essentials of Trading will know that I have long had the CANSLIM system as the underlying philosophy of my stock trading. I can get much of the same info through my broker, but using the Daily Graphs service can make the process quicker and more efficient.

I have also paid for MetaStock and Sierra Chart with IQ Feed data. Seeing as I work for the parent company of MetaStock now, I get the software and data free these days. I first started using it back in the middle 90s, however, and paid for the software and EOD data (didn’t need intraday, and still really don’t) for more than a decade as something to back-up the free charting I was getting through my broker accounts and to work on research ideas. In the case of Sierra Chart, it was strictly about price distribution charting (Market Profile/TPO). Sierra Chart is very reasonably priced and has some other nice features, like a replay function.

Beyond that, I’m probably pretty boring. I use Excel a great deal for performance tracking, data analysis and research. My knowledge of and experience with VBA makes it a powerful tool for me. That’s about it, though. I tend toward swing/position trading time frames, so I don’t need a lot of the decision-support help day trading can require.

Book Review: The Complete Trading Course

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By way of full disclosure, I received a free copy of Corey Rosenbloom’s new book The Complete Trading Course from Wiley at the author’s behest. Wiley is also my own publisher and Corey is a personal contact of mine. Oh, and he also lists me in the acknowledgements to the book. That was more for sharing my perspective as an author and commiserating on things than for any direct contribution to the text, however. This is the first time I’ve actually seen the book, so this review is coming from the perspective of a fresh impression. Corey, by the way, is an active blogger at AfraidtoTrade.com and contributed to my New Trader FAQs book.

Perhaps a more accurate title for this book would have been The Complete Technical Trading Course. That is what we’re talking about here – a front-to-back approach to applying technical analysis to trading. This is not, however, a survey book that attempts to walk the reader through all the various sorts of technical methods and techniques. The author, instead, focuses on the tools he actually uses in his own market analysis and trading.

The book starts off talking about trends, both in terms of defining them and in terms of identifying them. It then progresses into the subject of momentum, and that is followed by a chapter focused on market phases. All of this lays the groundwork for the second part of the book where it gets into strategies and tools. These include candlestick charting, price pattern analysis, Fibonaccis, and Elliott Wave techniques. The final section of the book focuses on trade set-ups and strategy execution.

It should be noted that this is NOT a trading system book. It’s about analyzing the markets and identifying good set-ups. If you’re looking for something mechanical you’ll want to look elsewhere. Also, the author is very much a stock market oriented trader, and that is reflected in the text. This doesn’t mean the methods and concepts are not applicable to other markets, however.

Overall, I’d say this is the exact sort of book I’d recommend to those readers of The Essentials of Trading who were interested in seeing how technical analysis can be applied in trading. It’s well structured and loaded with examples. I have a personal pet peeve with the standard internal formatting of Wiley Trading books, but that’s not the fault of the author and it doesn’t really detract from the message or lessons. Oh, and the bibliography is huge!

Bottom line: If you want a nitty gritty detail-oriented book on how to apply technical analysis techniques and methods, The Complete Trading Course fits the bill quite nicely.

Make sure to check out all my trading book reviews.

What Should I Read on my New Kindle?

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Last week I finally gave in and ordered myself a Kindle from Amazon. This is something I’ve been thinking about for quite a while. I read a ton, and some of it happens on my daily commute. While that’s fine for paperbacks, it’s not so great for hard covers, especially bigger ones. Just can’t handle them in one hand while holding on to a rail with my other riding on the train (I don’t get to sit very often). Plus, in the warmer months I like to read outside, and since I live near the coast that means wind flipping pages around when reading a larger book. The Kindle helps in both those situations.

I’ve also got a bit of green thinking going on here as well. I’ve started to feel guilty about buying print books when they are so readily available in electronic format now – and often at lower prices in any case.

Now, I’ve only just got the device, and have a few print books to get through before I’m likely to be focused on a Kindle book, so I won’t have a good impression on things for a little while yet. I have begun accumulating books to read, though. Project Gutenberg is a good source for public domain books and I grabbed a couple dozen of the classics from there last night. One of them is Adam Smith’s Wealth of Nations.

What I would love to find is old trading books, which basically means early 1900s. I’ve started doing some research. If you know of any, definitely leave a comment below.

I’m also going to be developing a list of books to read and include among my trading book reviews here on this blog. If there’s a book (or books) you would like to see me write about, definitely let me know. And they need not be strictly non-fiction. There’s a fair bit of trading and markets oriented fiction out there (for example, the books by Paul Erdman). I like to read that kind of stuff, so definitely include those titles too.