Trader Resources

Black Friday Suggestions for Traders

Today, of course, is the notorious Black Friday – that crazy holiday shopping day which is supposed to get retailers into the black for the year. You won’t catch me anywhere near any shopping locale, and not just because I have to work (someone please tell me what sense it makes for today, not Wednesday, to be the early markets close). Keeping with the theme of the day and the season, however, I’ve got some suggestions for your shopping list. These items are largely taken from a 12-days of Christmas sort of thing I did a couple years ago as outlined in the Traders Wish List.

Of course I have to put my own book, The Essentials of Trading at the top of the list. Good for anyone getting into trading or looking to get their trading on track. 🙂

Market Wizards

My own book aside, Market Wizards and its follow-up editions The New Market Wizards are right at the top of the list. They pull together insightful interviews done with some of the great traders and investors of the modern day. There are names you may know and others with whom you may not be familiar. They cover the wide spectrum of markets, methodologies, and trading styles making the information and opinions of broad value to all traders.

If you’re in the market for charting and system design and testing software, Metastock should be at the top of your list. Metastock is the charting software package I have used for more than a decade now. If you have read The Essentials of Trading, you will know that I used charts and the results of system tests from that package as examples in the book. I continue to use it on a daily basis when I do my market analysis and write commentary.

In particular, I have worked mainly with the End-of-Day edition for my personal use because I generally do not need the functionality of the real-time versions. Regardless, though, the quality and functionality is outstanding.

Financial Fiction
Should you be in the market for some fireside reading to help you get through the cold winter months, there are several books in the trading fiction category I’d suggest. The Day Trader by Stephen Frey, Nest of Vipers by Linda Davies, Free to Trade by Michael Ridpath, and The Velocity of Money by Stephen Rhodes are all ones I’ve enjoyed.

And definitely check out the books by Paul Erdman. He is perhaps the premier author of financial markets fiction. Erdman has published a quite a few excellent books. They combine very entertaining and enjoyable reads with incredible market insight. In fact, his stories have, over the years, been viewed as predictive of developments that eventually came to pass.

Here are some of Erdman’s titles:

Liar’s Poker

Michael Lewis is a well known writer these days, and probably best know in the wider world for his book Moneyball. You may be familiar with that one, as in it he chronicles the evolution in baseball to a more statistically based system of evaluating players. Liar’s Poker, though, is the book that put Lewis on the map in the first place. It is a semi-autobiographical look at Lewis’ relatively brief career in investment banking. He was in the middle of the 1980s glory days as a member of the Salomon Brothers team. The people he worked with are some of the truly significant names on Wall Street – some of whom would eventually go on to found the now notorious Long-term Capital Management (LTCM). Consider this one part history, part insight into life inside Wall Street firms.

I could go on and on, but rather than fill the page up here I’ll just refer you to the entries on the Traders Wish List. Enjoy! And definitely feel free to offer up suggestions of your own.

Trader Resources

A Collection of The Essentials of Trading Reviews

The Essentials of Trading book by John Forman

I found out about a set of reviews of The Essentials of Trading on a site I’d seen advertised, but never previously visited.  It’s Now, I don’t know anything at all about who runs the site or anything like that, so I can’t speak to the overall nature of it, but I was impressed by the reviews folks post for my book. They were quite well thought out and written.

No, I don”t know the posters, though one of them indicates that (s)he knows me from my posting on BabyPips. 🙂

Here are some of the comments:

I purchased this book because I wanted to learn more about trading and this book did not disappoint me at all. It covers essential topics you need to know when you want to start trading.

I also found John’s writing to be clear and concise. He covered important areas such as 1) having a plan, 2) having a reliable system, 3) the importance of testing and of course 4) final application.

This book has really changed my views about trading which is why I would recommend this book to all aspiring traders who also value learning and development.

I think that one hits quite well on the major focus points I had for the book.

I admire the author of this book because he’s able to discuss forex trading like it’s the most interesting topic on earth. He explained the basics thoroughly and made the fundamentals sound easy. He’s got style, he’s organized, and he’s very persuasive. He made it clear (and I agree as well) that hands-on learning and experience are the best ways to acquire forex trading skills. I now apply all the things I’ve learned from his discussions about the different trading systems and strategies on my practice account.

The whole idea of gaining understanding through experience is a big part of what I tried to encourage through the book with lots of hands-on exercises.

Of course not everyone is going to like the book for whatever reason. There is one negative review:

This book sucks out all enthusiasm I have for trading. The author peppered the pages with lots of illustrations, examples of market trades, and testimonials from traders. The subtitle is slightly offbeat because there are only a couple of ways a beginner trader can “build a winning strategy” using this book. The route towards a successful trading is not clearly defined. Trading aspirants would expect definite steps to follow.

Scammers are abundant in this industry and clear-cut recommendations on how to avoid getting scammed might have helped. The author also didn’t include the proper ways to seek credible and reputable brokers. Rate is low.

I can’t speak to a person’s enthusiasm specifically, of course, but my attempt wasn’t to provide a rah-rah cheer-leading text. It was to produce something realistic and useful. If that takes the edge off someone’s enthusiasm, then maybe it needed dulling.

As for detailed steps to follow, there are loads of them but they can only go so far. It’s a foundation book pointing out where the reader is going to have to do her/his own work to identify the path they will follow. That’s an individual decision-making process in regards to markets, time frames, methodologies, risk tolerance and things like that which created a wide array of potential paths. I couldn’t possibly have addressed them all, but the book does point out very specifically (and repeatedly) the decisions the reader is going to have to make to take their trading forward.

That said, the criticism about lack of recommendations for choosing brokers and avoiding wasting money on unnecessary or scam products is fair. It’s something I do wish I’d included and will do should Wiley decide to do a revised edition.

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.

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: Way of the Turtle

[easyazon-link asin=”007148664X”]Way of the Turtle by Curtis Faith[/easyazon-link]I’ve just completed [easyazon-link asin=”007148664X”]Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders[/easyazon-link] by Curtis Faith. If the term “Turtles” has you scratching your head, then I will start by saying that they were a group of students brought together by legendary trader Richard Dennis (featured in [easyazon-link asin=”1592802974″]Market Wizards[/easyazon-link]) in the mid-1980s as part of an experiment to see if successful trading could be taught. Dennis and his partner William Eckhardt (featured in [easyazon-link asin=”0471132365″]The New Market Wizards[/easyazon-link]) selected two classes and taught them their trend following methodology, then provided each with trading capital and set them loose on the markets.

Way of the Turtle is less a history lesson about the Turtles (for that you can read The Complete Turtle Trader), and more a deeper discussion of the philosophy behind the trend following methodology Dennis and Eckhardt taught them and the implementation of that system. The Turtle system has been published in other formats and other places before now, but Faith does more than that in Way of the Turtle. He talks considerably about the requirements for successfully implementing the system and how easy it is to fail with it.

To my mind, Way of the Turtle is a book of three primary parts. One is a really interesting discussion of the psychology of traders and the markets. Another is a very thorough exploration of system development, testing, and performance measurement. The final part is specific discussions of the Turtles and their methods.

The issue some readers might have is the manner of presentation of the parts.

I personally found the chapters on system design, testing, and evaluation to be the most unified and consistently coherent of the book. They progress well and present some things that I have not previously seen in comparable discussions. I spent a couple of chapters on the subject in [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] and I found Curtis’ coverage of the material to be an excellent advancement into somewhat more complex approaches. His discussion of the subject is, to my mind, a virtual must read for anyone look to develop and/or evaluate trading systems.

In terms of trader and market psychology, the early chapters of the book are an outstanding exposition on the different biases and mental states that we all go through as market participants in one fashion or another. It was this material, so plainly laid out, which got me very excited to be reading the book. It really is a fantastic look at the things we have in our heads which can create so much havoc in our trading, and Faith frequently cites examples of these things through the remainder of the book in talking about his and other Turtles’  successes and failures trading their system.

It’s in the third subject of the book where many readers may find it lacking. Way of the Turtle, as I noted at the outset, is not a history. While Faith does clearly delineate the full Turtle system, he spends relatively little time talking about the grand experiment which the Turtles were meant to be. Rather he provides views and opinions from his own perspective. That makes for a narrow scope. This isn’t necessarily a bad thing. One just needs to realize that going in and be prepared to find it in little bits scattered throughout the text.

Here’s the biggest rub – at least for someone expecting to come away with an immediately useful trading system. Even though the book does tell you exactly how the Turtle system worked, don’t expect it to be something you can use yourself. It was specifically designed for use across an array of markets by traders with a large capital base. By that I mean hundreds of thousands of dollars, minimum. As such, the vast majority of readers will not be in a position to make use of it.

So it’s a question of expectations. Are you looking to become a new Turtle and trade just like them? If so, you’re probably going to be disappointed. If, however, you are looking to learn from the experience and education of someone who was there, who learned a great many lessons under the tutelage of a pair of legendary traders, then you will probably come away from reading [easyazon-link asin=”007148664X”]Way of the Turtle[/easyazon-link] quite satisfied.

Trading News

Another Rogue Trader

If you were completely out of touch Thursday you might have missed the adventures of our latest rogue trader. And this one’s a biggy. He puts Nick Leeson to shame. How about $7bln+ in losses for his employer, French bank Societe Generale. Inexplicably, he’s vanished. Imagine that!

Let’s just say someone didn’t practice very good money management. 🙂

By the way, a lot of folks are blaming this guy for the market insanity this week. He apparently had gotten very, very long (read tens of billions worth) in European stock index futures, especially the DAX. The unwinding of that position, which Soc Gen only found out about on Friday, was a major contributor to the global sell-off.

Rogue Trader - Nick LeesonIn case you never heard the Nick Leeson story (he’s the guy who sank Barrings Bank about a decade ago) you should definitely read his book – Rogue Trader. If you can get beyond the questionable ethics of helping a guy who caused the loss of over $1 billion and the death of Britain’s oldest bank make a few bucks based on his experience doing so, then it’s a interest read. The film version starring Ewan McGregor is ok, but lacks the real depth of the story as Leeson tells it in the book.

Another good read if you’re into the kind of “inside Wall Street” type of book is Black and White on Wall Street. This one is an autobiography written by Joseph Jett, a former Kidder Peabody fixed income trader who was accused of improper trading or accounting or something (it’s a bit unclear) which resulted in substantial losses. Unlike the Leeson book in which he admits to his wrong-doing, this one is an attempt by Jett to tell his side of the story and clear his name. There are some complex financials issues discussed in places, but they don’t really hinder things when you read it.

News & Updates

The Essentials in China

I received a note the other day. It was from my editor at Wiley informing me that they had agreed with a publisher in China to produce a Chinese language version of The Essentials of Trading. That’s pretty cool. It’ll most likely be several months before this new edition is in print. Even still, I’ll be quite interested to see what it looks like.