The Trader’s Pendulum

Reading The Markets‘ Brenda Jubin has penned a “jaded book reviewers” take on Jody Samuels’ new book The Trader’s Pendulum: The 10 Habits of Highly Successful Traders (Hoboken, NJ: John Wiley & Sons, 2015).

 

A couple of things are going on here to explain Jubin’s concerns. Samuels’ book expands on a highly cited Stocks & Commodities article about trader development. Wiley’s acquisition follows other successful books on trader development by SMB Capital’s Mike Bellafiore and other authors. Samuels’ coaching emphasis on factors like goals, business planning, personality awareness, and measuring performance for new retail traders also mirrors entrepreneurship advice by authors like Eric Ries and Guy Kawasaki.

 

In other words: cultivate deliberate practice (K. Anders Ericsson).

 

I’m thankful Samuels’ book is available on the Wiley Online database. I do wonder though: as an ex-institutional trader what specific advice would Samuels give new and emerging traders on dealing effectively with today’s electronic execution services: algorithmic trading, dark pools, and high-frequency trade firms?

On Ryan Mallory

During the past two days of my work commute I looked at Ryan Mallory’s The Part-Time Trader: Trading Stocks as a Part-Time Venture (Hoboken, NJ: John Wiley & Sons, 2013). Mallory runs the website SharePlanner.com. He was once a contracts manager for a Fortune 500 company. Much of the book deals with office politics reminiscent of The Office television series and the film Office Space which both Mallory and Venkatesh Rao like. Reading The Markets’ Brenda Jubin has a good summary of the book’s key points.

 

Mallory’s preference is to transition from a part-time trader whilst at work to becoming a full-time trader. This transition appeals to the United States trader subculture hence Wiley’s publishing contract for the book. What matters here is the dream image or ideal — the Ka to the ancient Egyptians — where Mallory mentors his readers to make this transition.

 

I am starting to form a different view to Mallory’s preference.

 

First, you have to treat the popular trading literature as a form of ideology about capital flows and financialisation. Mallory is best when he gives advice on heuristics: don’t look at profit/loss during a trade because this creates anchoring and representativeness biases, for instance.

 

Second, you have to screen out or at least ‘reality check’ the aspirational dialogue about becoming a full-time trader. Most brokerage accounts are under-capitalised and ‘blow up’ in 6 to 18 months of trading. The existence of subscription-based services like Mallory’s site hides this pattern. It also obscures the importance of survivorship bias when assessing trading records. Texan author Don Webb’s insight that occulture involves “selling water by the river” also applies to some trading books and overlaps with the entrepreneurship literature.

 

Third, the decision to trade full-time involves an emphasis on success in the present over long-term financial compounding. This affects both future salary and superannuation entitlements. You really need an edge and positive expectancy in your trading system. You need to be clear on what your alpha is (excess returns adjusted for risk and actively managed) and from whom it is being extracted from. These are critical details that Mallory understandably omits — but they are just as critical as specific trading set-ups.

 

Fourth, changes that include a mix of sustaining and disruptive technologies, and new market microstructure, affects Mallory’s advice. You can now trade on a mobile phone for intraday and swing trading, rather than relying on monitor privacy and flying ‘below the radar’. Constant monitoring of markets can create high transaction and execution costs, and can affect taxation. This is where the ideology or image of popular trading can become self-defeating when compared with proprietary, fund management, or institutional strategies.

 

Fifth, in the next 5-to-15 years there will be brokerage level versions of popular market algorithms and machine learning capabilities. These quantitative frameworks and tools — which exists for institutional traders yet not for retail traders — will disrupt many of the small capitalised, full-time traders who are the book’s audience. One of the key ways to also track this is the size of margin loan lending conducted in the major brokerages.

 

Mallory’s book was useful to think through these observations and to develop a different personal strategy.

 

For starters, I look more closely now at the optionality or upside potential of research programs.

22nd August 2012: Crowded Quants & LTCM

The 1998 collapse of the hedge fund Long-Term Capital Management is a case study in intellectual hubris. I read Roger Lowenstein’s When Genius Failed whilst writing a 2003 foresight post-mortem on LTCM (PDF). There were several different explanations for LTCM’s failure. One group blamed Russia’s default in August 1998 as an external, exogenous shock that blind-sided the firm. Another group blamed LTCM’s Nobel Laureates and traders. A third group found deep divisions in LTCM and blamed the firm’s computer systems. Ludwig Chincarini‘s new book The Crisis of Crowding: Quant Copycats, Ugly Models and the New Crash Normal (New York: Bloomberg/Wiley, 2012) revisits LTCM’s demise and argues that it foreshadowed the 2007 crisis in quantitative firms and the 2008-09 global financial crisis. Wiley has posted chapter excerpts whilst Brenda Jubin has a positive review for Reading the Markets — Chincarini looks to have written a very interesting book on rational herding in financial markets (PDF).

5th June 2012: Roy Christopher’s 2012 Summer Reading List

Roy Christopher

 

Roy Christopher‘s annual Summer Reading List is a snapshot of “the salient texts of the zeitgeist.” RoyC’s 2012 list continues the tradition: rich insights from netizens, ethnographers, cultural luminaries, mentors and critics on the authors, ideas and frameworks that inform their work. An Edge or Iconoclasts-style dialogue/trialogue between some of these people would be very interesting to witness.

 

I spent a lot of the past year reading about Wall Street, writing draft zero of a political science PhD, and trading a small portfolio. My suggestions this year reflect this personal journey and are different to what I would normally contribute to RoyC’s list (and what other list contributors would probably read and sympathise with). There are books on geopolitical risk and salary negotiation, PhD texts on social science methods, and guides to investment, hedge funds, the visceral feel of trading, and institutional money management. Brenda Jubin’s awesome blog Reading The Markets informed some choices and Tadas Viskanta’s blog Abnormal Returns is now a daily visit. Hopefully, you’ll get a sense of how I approach and attempt to understand a knowledge domain on its own terms, even if some of the material is a very dry read.

 

The joys of this list include uncovering new things, and seeing things you are familiar with from a different vantage point. RoyC pointed out ethnographer and sociologist Tricia Wang‘s contribution to me: Brian Eno and Manual De Landa have also influenced me, and I will be checking out several of her banking and finance ethnographies. Likewise with RoyC, the cultural anthropologists Victor Turner and Arnold van Gennep are influences; I studied Aaron Wildavsky on risk; and I bought a secondhand copy of Anthony Wilden’s Systems and Structure from an old secondhand book shop in Melbourne.

 

I also participated in RoyC’s Summer Reading Lists for 2011, 2010, 2008, and 2007 (I missed 2009). You’ll see how my in-progress PhD project and other interests have evolved over the past five years. RoyC’s annual summer reading list now has a quality like Michael Apted‘s Up series: an unfolding, longitudinal journey through some interesting ideas of the early 21st century.

5th April 2012: Jack D. Schwager’s Market Wizards

http://www.youtube.com/watch?feature=endscreen&v=8SdHlfsA0P4&NR=1

 

Jack D. Schwager‘s book Market Wizards is mandatory reading for traders and out in a new, 2012 edition. Brenda Jubin’s review explains Market Wizard‘s impact, its interviewees, and its influence amongst traders. Schwager interviewed a diverse range of traders about their motivations, strategies and market insights. Schwager’s new book Hedge Fund Market Wizards will be published in May.

 

Market Wizards also reminds me of the fourth volume of interviews with futurists and strategic foresight practitioners that Richard Slaughter, Sohail Inayatullah, and Jose M. Ramos compiled for The Knowledge Base of Futures Studies.