I finished Trading Systems and Methods (2013) by Perry Kaufman today. What a mammoth. Some interesting topics for me included regression analysis, RSI, and my running favorite, seasonality. This book really covers it all when it comes to both fundamental and technical analysis. Later in this post, I rewrite one of the quotes just for reinforcement and repetition, although I have mentioned these topics in previous posts. By the end of this book, I felt like I'd finally reached a point where there are much fewer 'new' concepts. That is to say, I can distinguish what is "traditional" regarding trading. When something new appears, I can at least compare it to some other idea, indicator, process, analysis, or term I’ve seen previously.
I woke up in Chapter 14: Behavioral Techniques, when it said: “Short-term systems are more likely to target investor behavior than economic factors because, over a few hours of one day, the influence of macroeconomic policy and long-term trends is very small." I believe that the combination of investor behavior in lieu of fundamental announcements is quite powerful. The news items that affect prices the most are stated as:
• Release of economic statistics (PPI and CPI for inflation, retail sales, balance of trade, employment and initial claims, consumer confidence, housing and refinancing).
• Action by the Federal Reserve or other central banks to change rates or change their bias (the way they express future policy).
• Changes in the money supply that indicate easing or tightening.
• Government reports on commodities production and inventories.
• Unexpected news or price shocks, such as an assassination or terrorist attack
• Trade negotiations, agreements, legislation, and occasionally rulings by the U.S. Supreme Court that affect business.
• Weather and natural disasters, such as the Japanese earthquake, or a hurricane that affects the sugar crop or causes large payouts by insurance companies (or COVID!)
• In-depth studies by the Wall Street Journal.
• Front-page news articles and dominant television coverage of high prices, strikes, etc., and their potential effects on business.
• Market letters, research reports, and comments from accepted authorities, major brokerage houses, and influential organizations.
"[T]he CFTC releases its Commitments of Traders (COT) report each week. It tells the distribution of holdings among large and small speculators and hedgers as a percent of total open interest."
Throughout the book, there is an emphasis on labels like “contrarian,” among others that distract from learning what tools can be employed to make a profit. Quite simply, the book is filled with tips and information useful only to the individuals seeking positions at well-established institutions. Often, I read thinking, “that would impress somebody if you pop that out in conversation,” or “I would think that perspective could potentially make me money,” even if I’m not exactly sure how.
And OMG, I’ve heard enough talk about the golden spiral/ratio for one lifetime. I’m a lover of all beauty in mathematics, and this is still just ridiculous to me, but so is astrology as a serious subject in trading. The takeaway is the power of people to self-fulfill their prophecies. This is also in Ch. 14 on behavior. It was good stuff. I had no idea there was “Financial Astrology Software.” What a world. The question going forward is how prevalent it is and what's the trend on ignorance in the trading population.
In Chapter 23: Risk Control - “Long-Term Capital Management, a home for some of the smartest
financial minds, believed they could engineer the risk out of each trade by explaining
away all of the previous price shocks, then failed to survive the next price shock. Without
including these larger, infrequent losses in the performance profile, trading accounts are
likely to be undercapitalized.” There were a few nuggets like this that I just ate up. Overall, I give the book a B. Although it was a huge book, and impossible to absorb all the topics on the same level, it is a great reference, something to go back to again and again. The amount of stats, geometry, algebra, and even differential equations speaks to the depth of knowledge presented.
So, let's see, that's... 43 books. The last and final book, A First Course in Corporate Finance by Ivo Welch (2006). This is also a huge one. We'll see what I can get outta this one. Laterz.
***********************************************
I’m going up to 4% risk from here on out because my time to go live is coming soon, and I need try a few more things, sooner than later. Quick calculation, if I take 10 trades, risking 2% for SL, 4% for TP, let's say I'm successful 50% of the time.
5(.04x) - 5(.02x) = 5(.02)x = .1x. That means I'd gain 10% on my capital (x). So odds are in my favor if I'm correct only half the time! I just had to point that out. Now, what if I increase the risk to SP of 4%, TP of 8%:
5(.08x) - 5(.04x) = 5(.04x) = .2x = 20% gain. The risk makes it important to be more accurate because I can bleed my account sooner. Oh my goodness.
No comments:
Post a Comment