Trader’s Narrative

Before the SEC could make their move, BATS and Nasdaq decided to ‘voluntarily’ stop flash orders. As alluded to before, this is a good development because it returns us to a state where all participants on the exchange have equal access to information, without any heavy handed regulatory action.

For more economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all go to news.tradersnarrative.com:

• Say goodbye to flash orders
• The Great Missed Opportunity of 2009
• No, The Price Is Not Right
• CNBC Concerned About Australian Camels
• Get a FREE Subscription to Financial Magazines
• Chinese markets have become a giant Ponzi scheme
• Kass: Dousing the Fire With Kerosene
• Has the Gold Bull finally arrived?
• Lessons From Irwin T. Yamamoto
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Turtle Trading using Excel Spreadsheets
• What’s the beef with high-frequency trading?
• Old Banks, New Lending Tricks

For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead: Fed Meeting & Retailer Earnings

Curtis Faith’s new book: Inside the Mind of the Turtles is primarily about risk and how traders should approach it. But it is also about Faith’s life, his background, successes, failures, and the many lessons learned as a trader and an entrepreneur.

The book starts with a gut wrenching decision that he had to make when a friend was thrown overboard from their sailboat. In a split second, the situation required him to analyze the risks of each option and to make the right choice between going back to try to help his friend in extreme weather or going for shore to get help.

Risk, according to Faith involves three elements: uncertainty, consequences and exposure. Without all three, you really don’t have ‘risk’. After defining it, he dedicates a chapter each to the seven proper approaches to managing and profiting from risk:

• Overcome Fear
• Remain Flexible
• Take Reasoned Risk
• Prepare to be Wrong
• Actively Seek Reality
• Respond Quickly to Change
• Focus on Decisions, not Outcomes

Most of those are self-explanatory so I’ll limit myself to detailing just the ones that aren’t. By “Actively Seek Reality” Faith is referring to having the most accurate perception of reality in order to be able to take advantage of opportunities. There is a difference between reality and our perceptions of it. So it is a constant struggle to not only untangle any misperceptions that we have, but also to be cognizant of how others are approaching the same set of variables and how the interplay of those two things presents opportunity or danger. Faith uses a business management analogy to expound this concept but I wish he had used an example from trading.

And by “Focus on Decisions, not Outcomes”, Faith means that traders are better served by paying more attention to the process of a trade rather than whether it was profitable or not. We all know that being right and making money are two separate things. So it is possible to make a poor decision, and make money. It is extremely important to be aware of this because if it becomes a pattern, it can be devastating.

There is a lot more of Faith in this book (than his first). He mentions the origins of his own interest in computer programming, his first ‘big break’ with Rotchie Barker (his trader mentor), why he dropped out of college, and what he did after he left trading behind. The book is peppered with personal anecdotes that either directly related to trading or are used as analogies to demonstrate a principle. In the last section of the book, Faith outlines his more general ideas, getting into philosophical on education, political views on government, society, management practices within corporations, etc.

You will be disappointed if you were expecting more of Way of the Turtle. But if you’re interested in a book that explores the psychological aspects behind the decision making process of trading, then you’ll enjoy Faith’s second book.

If you haven’t already, click to read my review of Faith’s first book, Way of the Turtle. That book is about the story of how Faith joined the small club of ‘turtles’ and how they made their millions.

I’ve contacted the winner of my “Way of the Turtle” book giveaway (Kris) and made delivery arrangements. Hope they enjoy their copy as much as I enjoyed mine.

Thank you to all who entered with insightful comments

As much as trading seems complicated, or perhaps, as much as we fall into the trap of making it complicated, there are really only three types of trades you could ever put on. In order of difficulty, here they are:

With the Trend
Trading with the trend is perhaps the most common, and I would argue the easiest of the three types. Turtle trading would fall into this category, as would dummy trading, Linda Raschke’s “Holy Grail” setup and many others. When you trade with the trend, your thesis is to go along with the crowd and ride the emerging or existing trend. A break-out type play would go under this category, as would a retracement type play - since both are anticipating a continuation of the dominant & previous trend.

Counter Trend

The opposite is to go against the crowd and to anticipate a change in direction. Most would tell you to never “fight the trend”. Although I wouldn’t recommend it to newer traders, it is a legitimate way to trade and make money. Or as Paul Tudor Jones II puts it: “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

Non-Directional

This is perhaps the most “advanced” form of trading and therefore the most difficult to execute. And for those new to trading, it is perhaps the most difficult to grasp. How can you make money if the thing just meanders??! You do so through the modern marvel of financial derivatives. Within a range of prices (blue lines), many option combinations allow you to make money through the sale of a ‘premium’. The simplest is a covered call position (or if you flip it around, a short put position). There are other combos that are incredibly complex and would make a PhD math student go cross-eyed. Do not venture into this territory without a good grasp of the greeks (delta, gamma, vega, etc.).

That’s it! So if you’re totally new to trading, or are a veteran trying to come up with a new strategy, it may be usefult to step back, wipe the slate clean and realize that no matter what kind of trade you put on, it will fall into one of these three categories.

Ahhh, the elegance of simplicity.

After writing my review of Curtis Faith’s “Way of the Turtle“, he graciously sent me a signed copy of the book as a gift. Which means that my original copy is now redundant.

So I’m giving it away. I know what you’re thinking. I just wrapped up my first contest and here’s the second one!

What can I say? I can’t have two copies hanging around, can I?

How to Enter the Trader’s Narrative “Way of the Turtle” Giveaway:

All you have to do is to leave a comment on this blog.

Yup, that easy. For this contest, anyone can enter. Just leave a comment on any post you like. Go back to previous posts (bottom of page, left hand corner), check out the Recent Posts on the sidebar or visit the “Best Of Trader’s Narrative” section and see if a post there piques your interest. Then leave a comment. But please, make sure that your comment is meaningful. Not something spammy like: “here’s my comment for the book giveaway”.

That sort of comment will not only not win, it will probably be erased. Instead, tell me if you like/dislike something I’ve written or if you agree or disagree and most importantly why. I would also like to hear from you if you have suggestions for future blog posts or this blog in general. Basically, use your own judgement to make sure your comment has some value. And don’t forget to provide a valid email. It will not be shown to others and I will only use it to reach the lucky winner and find out their address.

You can increase your chances of winning by leaving more than one comment. So, enter the giveaway as much as you like. Just make sure you are contributing something and not just ’spamming’.

When Will the Winner Be Announced?

At the end of the month, I’ll use a random number generator to pick one lucky commenter’s name from among the comments I receive from now until then.

Who Can Enter?

This giveaway is open to the whole world - not just US or North America. So if you’re somewhere in Nepal, you can still enter. Just allow enough time for the yak to deliver the book.

My buddy who took a law course at night-school tells me to add: “Void where prohibited by law”

And don’t forget to visit Curtis Faith’s own blog for some great insight and to get a free preview of the first 25 pages of The Way of the Turtle.