Answer to Dan

Dan is a trader from Romania. He made a comment on my last post and this is the answer to him.

Dan, I urge you to get those two books and start reading them right now!

If there’s a trade with no chance of failure, it would be buying and reading those books. My own review of them (frankly not at the book’s level) is only an attempt to go through all my notes and organize them. I read “The Education Of A Speculator” three times and “Practical Speculation” twice. And I’m reading them – again – to make this review.

Unlocking some of the book’s secrets, right now:

1) Count – That means “have a quantitative approach”. Anedoctes and common knowledge will not serve to achieve long-term results. (Not even short-term!). Nor “feelings” such as “I have a feeling the market is going up”. Count. Believe in numbers. In statistics. Know the odds. Take a quantitative approach.

2) Correlate – There’s one part of the book that Niederhoffer says: “Only connect the bonds, stocks, currencies, grains, and metals, and you have it made.” (EdSpec, Page 148). There are setups that emerge, from time to time, from the correlation of one market to another. Those relationships, however, are not permanent, and they shift. So to count them again is in order.

3) Ever-Changing Cycles – The order that emerges from caos today may not be the same tomorrow. Cycles change. That’s why a strategy that worked last year would fail this year. In other words, take for certain that the market’s are not for the lazy, one-approach traders. There’s work to be done, and this work is to Count and to Correlate. Again.

4) Learn Some Statistics But Beware Of Fancy Math – There’s more to statistics than correlation, but you should not be too enthusiastic about fancy math. Market models have to be relevant, not an exercise of Ph.D. math. Recently I read from “Quantitative Trading” by Ernest Chan (another book I recommend) the following:

“I received a PhD from one of the top physics departments of the
world (Cornell’s). I worked as a successful researcher in one of the
top computer science research groups in the world (at that temple of
high-techdom: IBM’s T. J. Watson Research Center). Then I worked
in a string of top investment banks and hedge funds as a researcher
and finally trader, including Morgan Stanley, Credit Suisse, and so
on. As a researcher and trader in these august institutions, I had al-
ways strived to use some of the advanced mathematical techniques
and training that I possessed and applied them to statistical arbi-
trage trading. Hundreds of millions of dollars of trades later, what
was the result? Losses, more losses, and losses as far as the eye can
see, for my employers and their investors. Finally, I quit the finan-
cial industry in frustration, set up a spare bedroom in my home as
my trading office, and started to trade the simplest but still quan-
titative strategies I know. These are strategies that any smart high
school student can easily research and execute. For the first time
in my life, my trading strategies became profitable…”

These are the words of a Quant. So, try to keep it simple.

5) Beware Of Switches – This lesson (and many others, including the ‘Ever-Changing Cycles’) Victor learned from Bacon’s book on turf betting. That means, if you have a strategy, follow it. Don’t keep changing in near every trade you take. Have patience to follow your (proven, tested) approach.

6) Take Account Of The Vig – Vigorish can break your best strategy if you don’t take account of it. Commissions and slippage are often disregarded by newbies who only care about market “direction”.

7) There Is Deception In The Markets – Always were, always will. Take account of it. Deception is like a worm to the fish. You enter in a “false move” and get caught in a losing trade.  T.A. (Technical Analysis) “patterns” are a encyclopedia of deception. But there are others, too.

8 ) If everything else fails, Count. Again. Market rewards:  a) thinking, b) hard work, c) discipline.

I didn’t even mention here “Practical Speculation”, wich is an extraordinary effort by Niederhoffer and Laurel Kenner and will follow these posts on “The Education Of A Speculator”.

Hope this helps.