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Reader Questions Answered

Can you learn trading by reading books?

Here’s a question that is often debated in trading circles, and I’m sure in other subject areas as well. It was most recently asked of me by a member of my mailing list named Peter.

Do you think it is actually possible to learn how to trade from reading books?

I’m obviously the author of an introductory trading book. That being the case, it’s pretty obvious that I do believe books can be used to learn how to trade. I’ve been in numerous debates with those who do not agree with me on that point of view.

Let me be very clear, however.

My opinion is that like many things in life, the basics of trading can be learned from books,  but actually getting to the point of being a good trader requires experience.

For example, I could write a book on volleyball (the sport I coached for many years) which gives the reader a full understanding of all the rules, the various skills employed by players, and how the game works. They would have a complete understanding of the game, including how to serve, block, spike, and all of that, but until they actually got out on the court there would be no skill development. That can only come from doing.

Likewise, in trading there are a great many elements which can be learned through reading. My book, for example, explains the mechanics of trade execution and management, how prices move, the basics of market analysis, and a bunch of other things I would call foundational level information. And of course there are all kinds of specific techniques, systems, methods and the like which can be had from books, courses, and other media. These are all subjects which can be learned and turned into knowledge. Just like the person reading the volleyball book doesn’t become a player having done so, though, having the knowledge of trading is not the same as being a trader.

Now comes the counter argument:  If books can’t make you a trader, what’s the value of them?

To answer that question, imagine yourself having zero knowledge of, or experience, trading and being sat down in front of a trading screen and told to trade. Chances are you wouldn’t do very well. Sure, you might eventually figure out what those squiggly lines and numbers are, how to put in and take off trades, how to calculate your P&L, and all that stuff. With sufficient time you may even be able to develop out some good trading techniques – if you didn’t completely blow up your account early on, which would be very likely. In other words, it would take a lot of time to reach even just the point of competence, and you would no doubt make loads of mistakes along the way.

How much faster would the progression be if someone gave you even a basic introductory manual that outlined the mechanics of things? It would speed things up considerably, wouldn’t it?

That’s the benefit of educational materials. By providing us the information we require to reach a given point of competence, they allow us to move out the learning curve much more rapidly than experience alone can do. The better the educational resource, the faster our shift out the learning curve. And of course they can also provide us with knowledge we may never have developed through our own experience because we wouldn’t have gone down those paths – a specific indicator or trading pattern, for example.

In the end, however, it still comes down to experience. No book or any other developmental source can make you a good – or even a better – trader. All they can do is provide you with the knowledge to do so.  You have to put the knowledge to use for it to mean improved skills and trading competency. This is why I say repeatedly in my educational efforts that the reader/viewer/listener needs to take what I tell them and practice, practice, practice it.

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Reader Questions Answered

The key concept of The Essentials of Trading

As part of a big set of questions submitted by a reader (I’ve mentioned how that seems to happen quite a bit) there was this specific inquiry regarding The Essentials of Trading.

What is the key or important concept(s) covered in Essentials of Trading (ET) ? Do you revealed any trading setups or methods for any specific markets? Can the concepts taught be applied into any trading system/methods etc.

If I were to put it into one sentence, I would say the key concept of The Essentials of Trading is developing a strong trading foundation.

Keep in mind that I developed the book based on my work teaching trading to college students. I needed something (at least conceptually) with which I could help them develop their basic knowledge and skills. Since I couldn’t know what market or methodology they would each end up gravitating toward, what I focused on instead was the base knowledge set which is applicable across all markets, timeframes and styles. That is, to my mind:

  1. Practical knowledge of trading mechanics
  2. An understanding of how and why prices move
  3. Introductory knowledge of market analysis methods
  4. A grasp of risk manangement importance and methods
  5. The ability to put together a personalized trading plan
  6. The ability to develop and evaluate trading systems
  7. A basic idea of the impact of trader psychology

I did not write The Essentials of Trading to present a specific trading methodology. The book does include a sample trading system which was exploring in the section on system development and evaluation, but that wasn’t intended as a suggestion in any way.

There is also an appendix which outlines the main structure of the plan I personally use for trading the stock market. Again, however, that was intended more as an example of a fully developed trading plan, not as a specfic recommendation.

The thing I repeatedly attempted to drive home in the book was the view that trading is a very individual thing. It’s not cookie cutter. What works for me will not necessarily work for you. Each trader needs to look at things from their own perspective in developing a workable trading plan. It’s that middle part of the book which I think is actually the most important.

By the way, The Essentials of Trading Course has as it’s foundation the contents of the book, but the video format allowed me to do some things (like provide real life in-action examples) that can’t be done in print. There are also several additional items added to enhance the overall education experience.

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Reader Questions Answered

How do you set position sizing in Metastock system testing?

Developing and testing trading systems is about more than just entry and exit points. It also has to include a risk management element. The other day I received a question along those lines from a reader of my introductory trading book wanting to learn more about using Metastock.

Hi John,

Chapter 8 makes the following statement:

“An entry rule, in all its glory looks like this:

Go Long/Short n units when x occurs,

where n is either a fixed number or a formula based on risk”

Well, I thought it would be bold to just ask a MetaStock question to you, so I did check out the product’s help, couldn’t find an answer. Then went on to trade2win, and found some comments, but since I still have some doubts, I kindly ask your help.

My problem is I can go to the system tester and enter a condition for entry long or short, but it seems I can’t find a way to enter a value or a formula for “n”, in other words, how do you take care of money management when building your test?

Thank you in advance for any help, it would be greatly appreciated.

My response is to provide a picture. The following is a screen grab of the System Editor dialog box from Version 10.

As the red highlight indicates, when you do a Buy or Sell order you can define the Entry Size. The default setting will come from your overall settings. If, however, you select one of the other options (units, %) the formula bar will become editable. That means you do a customized determination of position sizing.

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Reader Questions Answered

Should I use charting software, and if so which one?

It appears that the trend in trader questions landing in my inbox these days is to ask questions in multiple parts. Another one came in over the weekend from a trader who prefaced his questions by saying

I have been trading(training) for one year now, hard work does pay off…I took a 15 hour in class forex course a year ago and since then I have been practicing, doing homework every single day, trying to understand everything and I am at the level where I know what I am doing, (99.99%)  I am taking forex very seriously and it is my long term career.  I have all of my strategies worked out and just started to trade last month along with my own trading system which I am implementing B4 placing an order.

The first question this intrepid new(ish) trader had for me was whether I would recommend using charting software, and if so which one would I suggest.

To answer the first part of the inquiry I’m going to say it depends. There are a great many free charting resources out there. Most brokers (forex and otherwise) these days have one through their platforms. Some are certainly better than others. My recommendation is that if your broker has what you need in terms of functionality and time frame, then I see no reason why you need to spend money on some other charting software, and the price data to feed it.

For my part, I’m a bit mixed. Some of what I do is readily available through most broker charting packages. There are things, however, which are not. That’s stuff like custom indicators (I do some studies on volatility) and system testing. Also, some forex brokers in particular don’t offer charts in longer time frames, like weekly and monthly. For that reason, I do use paid charting.

In terms of a good general charting package my preferred one is MetaStock. I’ve been using it for over a decade now. The charts are nice. I can do all sorts of things with custom indicators. I can also do loads of systems testing. It’s very handy. (Full Disclosure: I currently am employed by Thomson Reuters, of which MetaStock is part. I, however, came from the Thomson side into the merger and had been a paid user of the charting package since the 90s.)

The other package I use regularly is Sierra Chart. In particular, I do my price distribution analysis with this package (employing the TPO charts). There’s also a really nice play-back feature that I’ve used a couple of times in the videos I have produced. The one thing I would say is that when looking for a source of price distribution charts I found other packages which had what I thought were nicer presentations, but since I was only using that one feature I didn’t see a justification of the much higher price tags.

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Deep Posts Reader Questions Answered

Where can I get intraday forex data?

Here’s another question (or rather pair of questions) about forex data.

I am in need of some advice of FX data feeds.

1) I am looking for a free or cheap real time forex data feed I can use for my analytics. I don’t care how far back it goes, it simply needs to be real time. What do you suggest?

2) Historical intra-day forex data. Back to ’99 for the Eur/Usd and greater for other majors. What do you suggest?

Real-time data in any market often comes with a fair cost, though if you’re not classified as a professional it’s usually considerably cheaper. Forex is generally a bit different, though, given the lack of a central exchange (and thus data source). In the currency market the data is generally either strictly a broker feed or some kind of aggregate of them.

The cheapest way to get a live feed is most likely going to be through a broker. A lot of them have APIs or DDE functionality. Some charge, some don’t.

As for historical intraday data, Duksacopy (I think I spelled that right) used to offer free intraday data. Not sure if they still do or not. There are loads of other sources out there, though most charge for it. Just do a Google search and you’ll find many of them.

Be very cautious here, though. Data from one source may not match data from another, and in a meaningful fashion. I once did some back-testing using intraday data, but when I went to apply the system in question on a real-time basis the results were different. It ended up that the volatility of the data in the historical series didn’t match the volatility in my broker’s actual pricing. The historical period ranges (hourly) were in some cases considerably wider than those my broker had quoted.

In other words, I would not have been able to trade the prices my system was tested on. That’s a HUGE problem, and one any system tester needs to account for in their analysis. The optimal solution is to use data from the same broker with which the trading will be done to ensure consistency.

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Where can I find this forex data?

A reader by the name of Tom submitted the following question about forex and related market data.  

Hi John

Big Fan of your work. I hope you dont mind if I ask this question as I am still relatively new
at trading the fx markets.

I was wondering where would be a good source of market data. Im looking specifically for the interest yields for the treasuries of different countries (Euro, GBP, Japan, Aus etc) in order to analyze and trade their currency as forward rates can be used as an approx to central bank moves.

I am also looking for data on the fx futures market particularly the open interest.

My broker provides a report on this sort of thing yet I am not too comfortable solely relying on them for my analysis.

I’ve tried looking at Bloomberg.com however their interface isnt exactly user friendly. I was wondering if you would know any free sites that chart this data?

Many thanks

There are loads of sources for market data on fx futures. It just depends on whether you want a feed or just to look at a chart or a figure. If it’s the latter, a really good site is FutureSource. The site has loads of futures information, including both quotes and charts. Back in the day I used to actually trade the market intraday off those free charts (it’s delayed data, but I didn’t need real-time pricing for my purposes).

There is, of course, also the weekly Commitment of Traders Report. That’s released weekly by the CFTC, and includes a breakdown of positioning by the different types of forex futures market participants.

As for global interest rate data, I’ll admit that Bloomberg is generally the first place I go when I want to look them up – which really isn’t that often. The Financial Times site has some of that information. There’s also stuff on the Wall Street Journal site. The Interest Calculator on the Oanda FXTrade site might be useful.

Hopefully that helps. I encourage others who know of additional resources to leave a link in a comment.

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Deep Posts Reader Questions Answered

Does The Essentials of Trading cover strategies related to E-mini S&Ps?

Here’s another inquiry which came in recently.

Hi John:

My name is Brent and I am relatively new to the world of futures trading.  I majored in finance in college, so I have a basic understanding of some of the principles and verbiage… but it’s been about 10 years since I’ve been in the classroom.  I have been searching the Internet looking for information about futures trading, and I was really impressed by the “non-intimidating” approach of your website. I presently find myself in a position where I have the opportunity to pursue a career in trading.  I have a few friends that have been moderately successful trading e-minis, and I think their success has awakened the “inner trader” in me… LOL… 

My question to you is:  Does your book cover strategies and techniques as related to E S&P Minis?  Even though some of my trading friends have offered to “mentor” me, I am a person who needs to be able to understand things conceptually. I am taking a huge risk by stepping out into the trading world, however with that risk there comes the possibility of a great return.  My desire is to do everything possible to ensure that I realize those great returns.  I look forward to being a productive member of your trading forum!!

Answering Brent’s question directly, I would firstly say that The Essentials of Trading is not specific to any market, including the mini S&Ps. Nor does it lay out specific trading techniques, except where they are used as examples to demonstrate things or make a point.

That said, the book (and by extension the Essentials trading course) definitely does fill the need Brent describes as “…to be able to understand things conceptually”. The material is very much intended and designed to be foundational, allowing one to learn the core trading concepts and have them as a strong basis for then moving on and developing a personalized approach to trading. Outlining the requirements of a good trading plan is a key part of the presentation.

I’m a little confused by the use of the phrase “career in trading”. I don’t know if that’s just Brent’s way of talking about getting into trading seriously, whether he’s planning on going after a position in the industry, or whether he’s planning on trading for a living.

As for the part about taking a huge risk, the statement I would make is that in trading you can take whatever risk is right for you. It need not be something extreme. Actually, it shouldn’t be. A healthy appreciation of the risks is definitely a good thing, though.