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Reader Questions Answered Trading Tips

Learning to ask the right questions about your trading

I had the following note come in over the weekend. Not only does it say nice things about my book 🙂 but is also addresses some very important points.

Hi John,

I bought your book because I’ve recently started trading index futures but my inner voice said something was not quite right. I started with a $10k account and got stopped a couple of times, so I was at $9780. At that point I realized that I was missing my entries because I was too busy running my own design business along with other domestic duties. Then I came across a paragraph in your book about the amount of dedicated, uninterrupted time it takes to day trade futures. Bingo-I was glad I stopped early and kept most of my capital. My mentor never mentioned any of this. Now I’m starting over and working on setting up a trading plan that can fit me — swing trading appears to be the goal at this time. I’ve been searching high and low trying to find information on how to really set up a good trading plan and your book is the first one I’ve seen that really addresses this important issue.

Sincerely,
Michele

Firstly, I’m glad Michele recognized early that she had a problem. It would have been better had she done so while demo trading so she didn’t have to lose the money she lost, of course. I definitely encourage getting real money trading experience early on in one’s development, but that doesn’t mean demo trading doesn’t have a proper place in sorting out one’s strategy and trading plan. Fortunately, Michele didn’t have to suffered an overly hard lesson.

Secondly, it doesn’t say much good about her mentor that they failed to take into account Michele’s schedule when helping her determine a good way to take on the markets. A mentor is supposed to factor these sorts of things in. Maybe we’re talking a specific stylistic mentor here, someone who focuses on one type of methodology (like day-trading S&P futures). Even still, though, they should recognize someone who is not suited for their trading approach (see Trading Coaching and Mentoring).

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Trader Resources

New book out from Market Wizards author Jack Schwager

[easyazon-link asin=”1118494563″][/easyazon-link]Jack Schwager is back on the bookshelves once again. Only a few months after the release of his latest Wizards book, [easyazon-link asin=”1118273044″]Hedge Fund Market Wizards[/easyazon-link], which came out in May, he now has [easyazon-link asin=”1118494563″]Market Sense and Nonsense: How the Markets Really Work (and How They Don’t)[/easyazon-link]. I had a note from Jack describing the new book in this way:

Market Sense and Nonsense is my personal compendium of the widely held investment misconceptions I have observed in the course of my career. The book has its origins in the various investment fallacy talks I gave at industry conferences in the mid-to-late 2000s, I always envisioned a book around this theme, but the idea had to percolate for many years before I could figure out how to write a book that was both pertinent to industry professionals and accessible to lay investors.

Although the publication of Market Sense and Nonsense comes only six months after the publication of Hedge Fund Market Wizards, it has been in the works for several years. I set aside a draft of Market Sense and Nonsense to write Hedge Fund Market Wizards, and I returned to complete the project after that book was finished (which explains the short time gap between the two books).

The basic theme of Market Sense and Nonsense is that many widely held investment assumptions are quite simply wrong—that is, if we insist they apply in the real world. I hope that Market Sense and Nonsense prompts readers to question some of their previously unquestioned investment assumptions and to change some long-held beliefs.

I anticipate giving [easyazon-link asin=”1118494563″]Market Sense and Nonsense[/easyazon-link] a read myself before too long, and will post a review once I have done so. In the meantime, if you have thoughts on this or any of Jack’s earlier books, definitely feel free to share them.

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Trading Book Reviews

Book Review: Hedge Fund Market Wizards

[easyazon-link asin=”1118273044″][/easyazon-link]It’s been a while since Jack Schwager has treated us to a collection of the insights and experiences of a collection of successful market participants, but he’s back with [easyazon-link asin=”1118273044″]Hedge Fund Market Wizards[/easyazon-link]. This is the fourth installment in the series which started with [easyazon-link asin=”1118273052″]Market Wizards[/easyazon-link] in 1989, added [easyazon-link asin=”1592803377″]The New Market Wizards[/easyazon-link] a couple years later, and got market-specific with [easyazon-link asin=”1592803369″]Stock Market Wizards[/easyazon-link] as the third of the sequence. I will admit that I wasn’t blown away by the latter book, but have long rated the first two very highly. I actually interviewed Schwager back in 1992 in his office at Prudential Securities (if I’m remembering correctly). His advice to me at the time when I asked was to learn computer programming to facilitate system development and testing, perhaps reflecting his own thinking toward taking a more systematic approach to the markets at that time.

Before I get into my thoughts, I think sharing the author’s own words will go a long way toward establishing expectations for the book as I’ve found that those few folks who have panned the series have only really done so because they went into reading the books with a mistaken view of what they would get.

“Readers who are looking for some secret formula that will provide them with an easy way to beat the markets are looking in the wrong place. Readers who are seeking to improve their trading abilities, however, should find much that is useful in the following interviews.” (from the Preface)

And of course interviews is what the book is all about. There are 15 in this latest variation on the Market Wizards series, each with its own introduction and concluding summary of key takeaways. Again, we have a diverse collection of money managers represented. They are grouped in to “macro”, “multistrategy”, and “equity” categories. I wouldn’t call this as broad a set of discreet categorizations as we saw in the earlier books, but this probably reflects the way trading and money management has evolved in the 20+ years since the first book came out.

I think those who have read one or more of the prior books will find some subtle differences in this new edition. It is clear Schwager is more confident in both his interviewing and his own views on trading and markets. There is more editorializing in this book than I remember from the others. At the same time, the author isn’t shy at all about drilling down on subjects and pressing interviewees to get the most out of them. This adds to the quality of the end product.

I was actually somewhat surprised how into the book I got personally. As an experienced traders, I found a kind of affirmation from some of the interviews (Colm O’Shea especially reflected a great deal of my own thinking as it has developed over the years). There were also a few “I never really thought about it like that” moments to give me new things to ponder, which is a plus.

I think having a significant recent (financial crisis) event central to the interviews helps. It also creates the same kind of contextual linkage the Crash of 1987 had for the interviews in the first book. This common reference point for readers makes it easier to be engaged by the text. It also helps developing readers from an application perspective in terms of allowing readers to have “Oh, yeah. I see what he was doing there” type of realizations.

There are a couple of interviewees in this book who present a challenge to individual investors in that they operate in markets where no individual really can take part (there is plenty of good footnoting to support explanations and definitions of subjects discussed). Most of them, though, operate in ways largely applicable by individuals, and even those who don’t still offer insights into how they are thinking about the strategies they are employing and the way they are positioning themselves in the market.

And really that’s really the crux of what’s on offer in [easyazon-link asin=”1118273044″]Hedge Fund Market Wizards[/easyazon-link].

It’s about hearing how successful traders think about risk, strategy, research, and everything else that goes into their efforts – getting inside their heads. There are a couple of more systematic traders in the group who don’t share much in the way of specifics, but the rest (who I would largely describe as being discretionary types) seem to have no problem at all in talking pretty specifically about the kind of technical and/or fundamental cues they look for to find good trades. If you’re after “I buy when the 15-day average crosses the 30-day” type of rules, you’re not going to find any. Most of the gentlemen interviewed (it’s all men in this one), though, are very open about the way they look for trades, manage positions, etc. For this reason, I believe there is a lot of value to be had here for new and developing traders.

Schwager ends the book with his own takeaways from all the interviews he’s done through these books. Those 40 observations alone are worth getting a copy of [easyazon-link asin=”1118273044″]Hedge Fund Market Wizards[/easyazon-link], especially knowing from whence they came. There’s also a very good epilogue written by his son talking about his own introduction to the Market Wizards concepts and their presentation which is well worth reading.

The bottom line is I think this is a good read no matter where you are on the spectrum of market experience.

Make sure to check out all my trading book reviews.

Categories
Trading Tips

What trading books do the pros read?

A poster on Trade2Win asked the following question recently:

So everywhere I look I see the same recommended books: [easyazon-link asin=”0471770884″]Reminiscences of a Stock Operator[/easyazon-link], [easyazon-link asin=”1118273052″]Market Wizards[/easyazon-link], [easyazon-link asin=”1592803377″]New Market Wizards[/easyazon-link], [easyazon-link asin=”0735201447″]Trading in the Zone[/easyazon-link], [easyazon-link asin=”007147871X”]Trade Your Way to Financial Freedom[/easyazon-link], [easyazon-link asin=”0471592242″]Trading for a Living[/easyazon-link], etc etc etc, you all know the rest…

…but I was wondering what books do professionals read?

Of course I’d add [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] to that list. 🙂

I’d also suggest looking at the list of books recommended by the contributors to my Trading FAQs book. You can see my own Top 5 Trading Books as well.

In response to the question, though, I’d make two points.

First, the poster wanted to get inside the head of trading professionals. Really, that’s the whole point of the Market Wizards books. If you want to know how they think, read that series.

Second, think about the sort of stuff a professional in any area would read. By the time you’ve become an experienced pro in any field you have already done the vast majority of the important reading you’ll do specifically related to your work. At a certain level of development you reach the point where you don’t really get all that much out of books anymore. Books are not generally written for the masters, but rather for the newbies and intermediate level learners.

At the pro level it’s about experience and keeping up with developments in the industry. This generally means doing and getting information from news and periodical type publications. And when you do need to learn something new within the field, it comes from more direct, specific sources. It tends not to include books, unless you’re looking to expand your knowledge into a new area.

I read a lot myself, but when I read books about trading the focus is more on judging the book for sharing with readers of this blog, my newsletter, etc. via my trading book reviews. The related books that I read for my own sake tend to be more economics and history oriented, reflecting some of my personal interests.

I’m interested to hear what other experienced traders have to say on the subject, though.

Categories
Trading Book Reviews

Book Review: Currency Trading in the Forex and Futures Markets

[easyazon-link asin=”0132931370″][/easyazon-link]I’ve just finished going through [easyazon-link asin=”0132931370″]Currency Trading in the Forex and Futures Markets[/easyazon-link] by Carley Garner. This is the second of Carley’s books I have read following A Trader’s First Book on Commodities. That book, and her regular article writing, motivated me to include Carley as a contributor to my Trading FAQs book and to do an interview with her in support of that. As you will soon find out, this existing relationship has little bearing on my objectivity where this new book is concerned.

On the plus side, this book does a pretty good job of outlining the different ways one can trade the currency market (spot, futures, options, ETFs). There are good explanations of the mechanics of forex trading in its different forms, as well as the primary methods used in the analysis of the market. This includes an in-depth discussion of the Commitment of Traders (COT) report as well as a limited section on forex seasonals.

My major issue with the book is the author’s bias. She is a futures broker, which puts a major lean in her perspective. This is not unexpected, but the blatantly manipulative fashion in which she casts retail spot trading in a negative light is something I find distasteful. She does it repeatedly in the early parts of the book by presenting some of the often-discussed concerns that have come up in the spot arena over the years (mainly related to forms of potential dealing-desk broker manipulations) with full commentary about how and why this could be a risk for someone getting into the market. Then, at the very end, after ratcheting up the reader’s fear level, she finishes with a line something like, “But that almost never happens.” This is the sort of thing I come to expect from politicians, not from book authors.

The casting of spot forex in a negative light, either directly or specifically relative to futures, happens throughout the conversation. I don’t mind that she has a preference, but I’d like to see a more objective discussion with less of an outright attempt to influence the reader. (I personally have traded forex through all the markets she discusses and continue to do so in different ways based on what I’m trying to do in the markets)

There’s also something of an error of omission in the comparison of spot and futures in terms of interest rates. The author rightly comments on the whole roll-over, interest carry mechanism that takes place in the spot market at the end of each trading day. She fails (as far as I saw) to note that the interest rate differential is also a factor in the futures market as it is priced in.

For me the negatives outweigh the positives, so I’m not inclined to recommend this book, though I did like her previous one.

Make sure to check out all my trading book reviews.

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Trading Book Reviews

Book Review: Buy and Hedge

[easyazon-link asin=”0132825244″][/easyazon-link]While it may be generally classified as an investing book [easyazon-link asin=”0132825244″]Buy and Hedge[/easyazon-link] by Jay Pestrichelli and Wayne Ferbert could easily be classified as a trading book because of the way it advocates the use of options. I’ll leave the reader to classify it for themselves, though, based on their own definitions of the two terms.

In a nut shell, the philosophy of Buy and Hedge is that any positions one takes in the stock market (and we’re really talking long-only here) should be hedged. Individual hedging is best, but portfolio hedging is also considered acceptable by the authors. Options are the favored tool to accomplish that hedging.

About the first half of the book puts forth the reasoning and justification for hedging. Mainly it comes down to reducing the volatility of your returns. The authors make the statement that the one thing you can control in the investing process is the risk. I’m not totally comfortable with putting it that way, but I get the point they are trying to make.

The second half of the book is focused on options and option strategies which can be used for hedging purposes. In fact, the authors go so far as to recommend strategies (though not necessarily in all cases) where no position in the underlying security (stock, ETF, etc.) is held – the position is totally created with options. This is probably something that will make traditional investing advocates a bit uncomfortable.

It should also be noted that the authors don’t have anything against a straightforward index approach. They just think that it should incorporate a hedging element.

All in all, I think [easyazon-link asin=”0132825244″]Buy and Hedge[/easyazon-link] is a worthwhile read for those who favor playing the stock/ETF market from a longer-term position perspective.

Make sure to check out all my trading book reviews.

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Trader Resources

Top Trading Reads from 2011

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.

  • [easyazon-link asin=”0137085508″]Investing with Volume Analysis: Identify, Follow, and Profit from Trends[/easyazon-link] (my review)
  • [easyazon-link asin=”0071614133″]How to Make Money in Stocks: A Winning System in Good Times and Bad[/easyazon-link] (on my Top 5 list)
  • [easyazon-link asin=”047179063X”]The Essentials of Trading: From the Basics to Building a Winning Strategy[/easyazon-link]
  • [easyazon-link asin=”0137085516″]Profiting with Iron Condor Options: Strategies from the Frontline for Trading in Up or Down Markets[/easyazon-link] (my review)
  • [easyazon-link asin=”0071440992″]The Handbook of Fixed Income Securities[/easyazon-link]
  • [easyazon-link asin=”0750660783″]Bond and Money Markets: Strategy, Trading, Analysis[/easyazon-link]
  • [easyazon-link asin=”0470932201″]Interest Rate Markets: A Practical Approach to Fixed Income[/easyazon-link]
  • [easyazon-link asin=”0470521457″]Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading[/easyazon-link]
  • [easyazon-link asin=”1592802974″]Market Wizards: Interviews with Top Traders[/easyazon-link] (on my Top 5 list)
  • [easyazon-link asin=”0137079303″]Mastering Market Timing: Using the Works of L.M. Lowry and R.D. Wyckoff to Identify Key Market Turning Points[/easyazon-link] (my review)
  • [easyazon-link asin=”0470594594″]The Trading Course: Technical Analysis, High-Probability Set Ups, and Execution Tactics[/easyazon-link] (my review)
  • [easyazon-link asin=”007147871X”]Trade Your Way to Financial Freedom[/easyazon-link] (on my Top 5 list)

Make sure to check out all my trading book reviews.