I don’t think I’ve been doing a very good job of generating developmental material for the site lately. The older articles I’ve written are still popular, but when I look at them now I mostly cringe. I think it’s because I was writing about problems I was overcoming, and now that I don’t have those problems, the posts seem silly. The old interview MWF recently posted reminded me of how different my viewpoint is today than it was in 2006.

It stands to reason that I would cringe less at more recent articles, if I would just write some. After all, I still have problems with my trading and I still work on them. It’s just that, the kinds of things I focus on now are more personal, and generally harder to put into words. And I am lazy.

I don’t mean personal as in private or embarrassing, but personal as in relating specifically to what goes on in my mind. And also, it’s harder to know when I’ve really “won” or learned anything worth passing on to others… it’s not as clear-cut as when I decided I knew something about profit factors.

I will give you an example. If I could change one thing about my trading today, I would want to trade all day as if it were my first trade of the day. If you read the site and watch the videos, you know that once I’ve made some decent money, I lose all motivation to trade. I still watch the markets, but none of the setups look good enough to me anymore. I feel sluggish and uninterested. On the other hand, when I’ve traded myself into a hole, I have no trouble finding good trades until I’m in the green again.

So, even though it presents itself as a kind of lethargy or distaste for trading, I have to assume that there’s some fear deep down of giving up the money I just made. Or maybe it’s something else. But the fear thing sounds good. I would like to fix this, because I think I would be well on my way to serious wealth by now if I could just keep trading enthusiastically. Trading stocks, I would usually take 3 to 5 trades, which for my style meant I had open trades in the market for a total of 2 or 3 minutes out of the market day. Obviously, there was room for a LOT more trades. The big downtrend on Friday gave me lots of opportunities in @ES that I didn’t take. You saw me take the first one effortlessly in the live trade video. Each trade after that took more willpower, and after I made a few more points I pretty much stopped at midday. Crazy!

So that’s the kind of thing I am focused on now. I am reading Trading in the Zone for the first time, in preparation for an eotpro event with the author. I had heard of the book a lot of times, but just never got around to reading it. Maybe I will find something in there, of use.

(aside: how stupid is it that Ari Kiev also wrote a book called Trading in the Zone? I didn’t even know that was allowed! I can tell you right now that my first two novels will be called Harry Potter and the Sorcerer’s Stone and The Holy Bible: King James Version).

I’ve heard a lot of people swear by How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition, so I read it this weekend. (yeah, after two books reviews this weekend it’d be hypocritical of me to post a weekend non-reading entry, so I’ll skip it)

I thought How to Make Money in Stocks was dated. It says “completely updated” right on the cover, and the copyright says 2002. Yet, it still covers controversial topics like:

• Is it safe to buy Nasdaq stocks?
• Decimalization of the markets
• Transactions should be reported on the tape within a couple minutes after they occur on the trading floor, but sometimes get behind

huh? I’m pretty sure that either the word “completely” or “updated” does not mean what the author thinks it means…

It describes the CAN SLIM stock picking method in great detail. It seems like a sensible enough strategy, and I know a lot of people use it. In terms of technical analysis, the book goes over cups+handles, and double bottoms, and gives example charts of stocks just before they broke out big. The general advice here is buy high and sell higher, rather than looking for a bargain.

It warns against day trading, which is typical of books like this, so I can forgive it. It also spends a lot of time pimping Investor’s Business Daily, which the author founded. I can forgive that, too (I kinda expected it).

What I’m finding more and more with non-fiction books is that it’s hard to compete with the internet. There’s nothing in this book you haven’t read on the internet, if you’ve been looking. Aside from autobiographical trader books, I think the days of trading books are numbered, if not already past. The same is true in most technical fields, as well. I’ve bought very few comp sci books in the last few years, since everything I’d want to know is on-line. So, even though there’s some good information in this book, it’s hard for me to recommend that you purchase it.

This weekend I read: Just One Thing: Twelve of the World’s Best Investors Reveal the One Strategy You Can’t Overlook. Like an idiot, based on the title, I thought the book was about one thing that twelve great investors agreed on. In fact, it’s individual chapters written by twelve different people, each about something different.

But, don’t let my stupidity keep you from reading this book… I thought it was pretty interesting throughout. The standout chapter, in my opinion, was the one on human behavior/psychology by James Montier. It outlines ways that humans are wired to make bad investing choices, which is something we’ve all heard before. But it’s pretty exhaustive, and describes the justification and relevant psychological studies very clearly. In some cases it also suggests ways to counteract our human deficiencies. I liked this chapter best partly because it was applicable to short-term trading (whereas a lot of the book is investor-oriented), and also just because I am intrigued by the way people work.

Another memorable chapter is by John Mauldin, the editor of the book. It describes trends in place now that are likely to shake up the world in decades to come. Again, it’s stuff you have heard before if you are interested in such things, like: the population in the West and Japan is set to decline, even as it ages. Looking ahead, what might that mean? I disagree with some of the conclusions he makes, though, about the population and the workforce. I think he’s forgetting how much technology can help us in those areas. For instance, he talks about how the west needs to desperately import young educated immigrants to fuel our workforce and support retirees. But, who’s to say that elderly people will need (or even want) to retire, or need a lot of care from human workers? If I’m going to live to be 150, I don’t want to be out of the game and bedridden from age 65 on… and I’m betting I won’t have to be.

Common themes in other chapters were: Don’t hold on to losses. You can’t make money with information everyone knows. Compounding works.

Has anyone read either of these books? They look very interesting to me. Especially the first one, which appears to be about applying modern signal analysis techniques to stocks… so we’re talking about adaptive filters that “lock on” to trends and cycles, versus a fixed-period EMA for instance. I’ve noticed that I have to use most indicators as “good enough,” and kind-of filter out the rough spots by mentally ignoring them when they seem not to apply. You know, like when a price seems to plow through a given MA again and again, I’m not going to pretend it might be support 10 minutes later! Well, maybe these more advanced indicators apply more often. Sounds like something I’d like to play with, if it’s any good.

[EDIT: If you've blocked my beautiful Amazon images, the two books are: Cybernetic Analysis for Stocks and Futures by John Ehler, and Evidence-Based Technical Analysis, by Davin Aronson.]

Well, the end of 2006 is nigh, and many of us celebrate Christmas or similar gift-giving occasions. So, I thought the time was right to start putting together some gift ideas for stock traders, stock brokers, financial advisors, etc. Of course, lots of us have refined tastes, and like nice, expensive, things in general. Here, I just want to focus on trading/finance themed gifts.

Here are the ideas I’ve found so far. I may make additional posts as I find more items.

Novelty Items

• There were several fun items at www.stockmarketstore.com. Here were a couple of them that stood out to me.
  • Apron that says “Will Cook for Money to Trade”, for the trader that also cooks.
  • I Trade, Therefore I Am Shirt
  • A “Hope” Candle, may it burn brightly for you in your time of need.
• Another site I liked was GiveAShare.com, which allows you to gift an actual framed share of a stock. I’ve traded millions of shares, but never actually held a share of stock in my hands. Kind of neat.
• There’s the We have charts and graphs to back us up, so F$@K OFF Buttons and Stickers (I originally saw this on Tim Knight’s Blog). Right now, it looks like they’re selling the button but not the sticker, but I suppose you could inquire with the bitchybuttons.biz store.
  
• If you have Jim Cramer fans to find gifts for, you can get Mad Money paraphernalia at The NBC Universal Store.

Trading/Finance Related DVDs

• Trading Places the comedy with Dan Aykroyd and Eddie Murphy as commodities traders
• Rogue Trader. A true story. I’m not kidding, I seriously never get tired of watching this movie… I think all traders can sympathize with how strong the urge is sometimes to make the same mistake that guy did (essentially just doubling down over and over on more and more margin). It’s incredible that he wasn’t stopped sooner.
• Barbarians at the Gate, a comedy loosely based on the leveraged buy-out of RJR-Nabisco
• Other People’s Money, a fictional comedy about a corporate buy-out, starring Danny Devito.
• Wall Street. Do I really need to say anything about this movie? Great film. Youtube has the famous Greed is Good speech, if you haven’t seen it.
• Wall Street’s ugly stepsister, Boiler Room. I thought the best scenes in Boiler Room were the scenes when they were watching Wall Street, but people seem to like this movie, so I’ll include it in the list.

Trading/Finance Related Books

There are a few in my Books I Enjoy page. Of books that came out in 2006, I thought these two were good:

• Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market. It was an entertaining book, but also very informative about how the lines between the analysts and the investment bankers at major firms were scandalously blurry.
• Winning the Day Trading Game: Lessons and Techniques from a Lifetime of Trading (Wiley Trading), centered on the idea of keeping a 24-hour multi-market context in mind, and the importance of key numbers like round numbers, and the opening price for the year, etc.

…and here’s a good book I read this year, but which came out in 2004:

• Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, which really made me think a lot about how much I owe my success to skill, and how much to dumb luck.

I just listened to a pretty good lecture on happiness by Daniel Gilbert, a Harvard professor, and author of Stumbling on Happiness. The talk was about how the brain is able to synthesize happiness with just about any situation. The corollary is that striving for the best possible outcome usually makes us less happy than just choosing any option and never looking back.

This is the mp3 (about 20 minutes long): http://ted.streamguys.net/ted_gilbert_d_2004.mp3

I thought three points were particularly interesting:

• Experimental evidence seems to say that, if something happened more than three months ago, it generally has no bearing on your current level of happiness, no matter how good or bad it was
• While most people prefer to have freedom to choose between options, and freedom to change their minds later, this tends to lead to less happiness
• An experiment on people with no short-term memory gave evidence that the brain actually re-tools its aesthetic preferences based on the situation it is stuck with. In the first phase, they were made to take their third choice of paintings. Later, even though that had no recollection of the earlier phase, they tended to prefer the paintings they were “stuck” with before.

The talk is short, and entertaining, if you like to think about things like this. I haven’t read the book yet, but it looks interesting.

I started thinking late last week that I am too attached to the outcome of my trades. By which I mean, when I have trades on, I obsess over each tick. I think it’s a natural inclination, since enough ticks have to go in my favor to keep me in food and shelter. But, it’s also a useless practice. Worse than useless, it’s actually stress, which is harmful.

I am not talking about heart-pounding, debilitating stress. I worked through that long ago, and detailed my battle with trading stress in another article. Still, I have concluded that even a little stress is too much. So, after some reading on the topic, I decided I will simply let go of it.

Yeah, right… that word simply doesn’t seem to fit a task like that. It is a sort of zen paradox, that it takes literally no effort to drop our attachment to things beyond our control, and yet at the same time it is very difficult to do so. So, in preparation for this week, all weekend I have been practicing getting into a generally zen mindful state. To me, it feels like an extension of meditation.

I am a long-time meditator. I started out meditating on an object, or a piece of music–just anything I could attempt to focus on completely. Eventually I “graduated” to letting my mind stand still, and empty. I think this is generally considered to be a much harder type of meditation to do. At least, I can say it was very difficult for me, and sometimes I still have to start with an object and work my way up to it.

The reason I bring that up, is that what I’ve been practicing feels to me like I’m meditating all day. I’d say it’s really great, but I’m not supposed to label things! :-) I focus entirely on the present moment, and just do whatever it is I am doing. I experience it as fully as I can. No distractions. No multitasking. No “chatter” in my head about the past or the future. No “chatter” in my head about labelling the present. I definitely did not achieve 100% mind purity, but there were stretches of time where I “got it.” Interestingly enough, I’m failing at it right now, because the way I write is mainly by filtering and critiquing some directed mental chatter. Oops! See how I give up my inner peace for you people? :-)

Two books that really helped me understand these concepts are Practicing the Power of Now and the rather unfortunately named Complete Idiot’s Guide to Zen Living. Of the two, the guide is more comprehensive, so it might make sense to read it first. On the other hand, I read Practicing the Power of Now first, and found it to be the more inspirational and exciting book. You might say, inspirational and exciting enough to make you want to read more books on the subject. I didn’t link to it because I can’t find it on amazon, but I have the audio book version, and I listen to it every month or so while taking a long walk. It’s good stuff, but I’d always thought of it as an aid to meditation until now. Now I am approaching it as a way to be.

I have said before, and see others claim, that meditation is great because of the way the peaceful quiet mind allows them to get reset, refreshed, and re-centered. Well, why partition your time so that you only have that for a few minutes a day? Why not just have a peaceful, quiet mind all the time? Why not just be centered, rather than have to periodically get re-centered? It seems kind of obvious to me now.

I will say, as with my early experience with meditation, it’s not particularly easy at this early stage. I have found that when I slip up and let my mind start wandering, it seems to wander extra hard (if that makes any sense). Also, when a negative thought creeps through, it seems to have extra force, or feels stronger than I think it should have. That could be either a kind of mental pressure building up, or it could just be that it is more jarring to my internal state compared to the quiet I just had. I can’t tell. Regardless, I believe that, as with meditation, it will soon become second nature. I just have to stick with it for awhile.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Arthur L. Simpson, the author of Phantom of the Pits (published in 1997), was an independent trader and a long-standing member of the Chicago Open Board of Trade at the time of writing. He may still be trading, I am not sure. He said that he considered the Phantom of the Pits to be the best trader he knew and perhaps the best trader in the world. So, I am gonna listen to the Phantom. One thing I learned becoming a fighter pilot was that you learn from the best pilots. Your life depends on it.

I read some more of the book last night. This quote hit home:

“Your thinking should be: When your position is right, you have to do nothing instead of doing nothing when you are wrong!”

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

There’s a hypothetical scam that I’ve seen outlined in two trading books now, and I think it’s clever so I want to share it. A book I’m reading right now kind of turns its idea inside-out, with scary implications.

Anyway, the scam goes like this: Say you want to grow your investment advisory business. One way to do it would be to mail out 10,000 newsletters predicting next month’s market direction. In 5,000 of the letters, predict up. In the other 5,000, predict down. At the end of the month, 5,000 people will think you understood something about the markets. So, next month, mail those 5,000 people another prediction (2,500 up, 2,500 down). Repeat, and after five months, about 300 people will think you have been right about the markets every month. Of course they will want to subscribe to your service to get your stock picks.

Cute, right? The book I was reading today, though, turned that scam inside out, and presented it like this: Say 10,000 traders commit their money via coin toss, either bullish or bearish on the markets. After 5 months, one would expect that as many as 300 of them will have made money every single month. Two or three will make money every month for a year. You can see by extension, with a large enough population of traders, some will be multi-year market superstars. Articles will get written about them, explaining how their superior methods led to their great success. Others will start following their trades, and seek their advice. Then one day, their luck will run out, but people will forget about that pretty quickly, replacing them with the next two or three lucky traders.

This book I’m reading, Fooled By Randomness, is slowly making me sick. I’m a fast reader, but I’ve had inordinate trouble finishing it–it’s taking a lot of willpower to pick it up. I think it’s because I don’t want to hear what it has to say. He’s making a pretty good case for a lot of so-called success in the markets being plain luck. And it’s not the run-of-the-mill efficient market crap, either. Being long in the market these last couple weeks hasn’t done a lot for my dispositon, as well! :-) I’d rather not read about luck when I have two positions hovering near their stops!

On the bright side, the author is a trader by profession, so he must not think it’s all hopeless. But, I’m 2/3 of the way through, and I’m still waiting for the part of the book that explains why there is some hope for us. It’s demoralizing!

At the risk of this blog becoming idempotent’s gambling journal, I wanted to mention that in the last week I have become infatuated with poker (limit hold ‘em in particular). I’ve read somewhere that lots of traders are also avid poker players, and now I know why! It’s an uncannily familiar feeling when judging when to wager and how much! Cutting losses when a hand turns against you, winning big when it doesn’t… poker’s got it all for people with trading in their blood!

Mini-Review
I got interested when I read The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time just on an impulse. It’s not a poker how-to book, but rather it’s about a Dallas banker who took up poker and played several extremely high-stakes games over the past few years. His name is Andy Beal, and from the description of him, he’s like my new hero. He’s done a little bit of everything in his career, from real-estate, to banking, to mathematics, to aerospace engineering, and now poker.

The book has a lot of colorful history of big gamblers, and their lifestyles. They acknowledge that their money-management is pretty reckless, and they all seem to balance that by taking money out of the casinos as often as possible, and doing their best to leave it out, for good.

So, I looked up how to play on-line, and started playing in fake-money games on yahoo. Just like in the stock markets, the whole key seems to be to wait for good opportunities. I think my trading experience really paid off here . By simply folding about 70% of the hands I got, I doubled my first fake $1000 stake in just 4 hours. I am hooked! It seems that the legal status of real-money poker in America is iffy, so I have so far resisted it. But, it’s tempting!

That got me thinking… what does poker have going for it that the markets don’t? Probabilities are easy to compute, and reliable. That is, I can get a reliable probabilistic lower bound on the expected value of my hand at any point. In fact, just quickly calculating, there are only about 2 trillion unique games with two players–less if you consider that lots of hands are equivalent, differing only by suit. Technology’s getting close to the point where you could just precompute them all on a large workstation. If you wait til after the flop, there are only 1.2 million possible outcomes with two players. On the other hand, in the markets, it’s not clear to what extent past behavior implies future behavior (some say, not at all!), so any probabilities you have calculated based on past events could be useless. So poker hands are a ton more predictable.

A downside of poker compared to the markets is the binary result–you can have an awesome hand, and still lose. And, you can have the a royal flush, but still only win a small amount of money. In the markets, everyone who is right, wins, and the amount they win is proportional to how right they are.

More directly related to the stock markets, I’ve started reading Fooled by Randomness : The Hidden Role of Chance in Life and in the Markets, and it seems promising, if a little long-winded. I will write more about it when I’ve finished it.

I’ve read a few more trading-related books in the last few weeks that I thought I’d share. For the most part, these are about traders and trading, rather than “how to beat the stock market” type books. I think, having mastered the basics of trading, these are the best kind to read. It’s more wisdom and less technique.

At some point I may make a post about what I think the best trading books I’ve read to date are.

First we have Trading with the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street, which I thought was a lot of fun to read. You get pretty much the same information, trading-wise, that you get from Jim Cramer’s Confessions of a Street Addict. In other words, they paid brokerages tons of commissions in return for getting the first call when new information goes out from the analysts. You also get a real flavor for the high-intensity environment of a hedge fund. I really think the two books are best when read as a pair, so you get the dual perspectives. Based on what I had heard about the book, I expected something much more negative, but it really just paints the same picture Cramer himself paints, but presents it in a harsher light.

Next, there’s Stock Market Wizards : Interviews with America’s Top Stock Traders. I haven’t read the other two “wizards” books, but have certainly heard of them. I picked this one up and was thrilled with it. We get interviews with traders that are still getting press today as the top traders of 2005, like Stephen Cohen. And, the paperback was updated around 2002 to get the traders’ perspectives on the stock market slump in 2000. It was fascinating, but one theme was clear: these traders are all confident, and all consistent even when losing. They are all doing spectacularly year after year with completely different strategies and methods, which just further reinforces that there are lots of ways to skin the market cat.

Sort of tangential to trading, I read Confessions of a Wall Street Analyst : A True Story of Inside Information and Corruption in the Stock Market. It was eye-opening, for me anyway. It outlines the author’s career as one of the top telecom analysts during the 90’s telecom boom, and points out how many conflicts of interest are inherent in the financial system between the analysts and the bankers.

These last two are ones I don’t recommend:

The book: Trend Following: How Great Traders Make Millions in Up or Down Markets didn’t impress me much. Its message amounts to: use a winning strategy consistently even during drawdowns. Maybe I missed something, or read it too fast, but it seemed to me that the focus was on mechanical trading, rather than following trends.

Lastly, we have Stock Trading Wizard : Advanced Short-Term Trading Strategies for Swing and Day Trading. I don’t know… this book might have been good in 1999, but today it read like it was a bit dated. I will say that it had some of the best-illustrated information on Level II quotes, but prices were still listed in fractions of a point, rather than in cents. I think for an introduction to swing and day trading, Short-Term Trading in the New Stock Market by Toni Turner is much better, up to date, and complete.