Trader’s Narrative

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

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.

Speaking of turtle trading (Way of the Turtle book review) and trend following, anyone noticed that the Mexican stock exchange has been on fire for the past few years? The chart looks beautiful with a gradual angle of ascent and very orderly pullbacks to support (200 day moving average):

If you look at a very long term chart (20+ years) you will see that this trend built a solid base from which to take off. The Mexican markets reached a peak in early 1994 and didn’t revisit that level until 2004! After basing just under the resistance level (~11,000) for a few months, they broke out in late 2004. And never looked back.

Until last year, Brazil (EWZ) was the strongest Latin market. Then it faltered and was overtaken by Mexico. Also notice how the relative strength of the Mexican market was extremely strong against the S&P 500. Even after each pullback the trendline of the relative strength was not broken. They were merely dips within a march upward.

So, is it too late to jump in? Well, considering that the base was 10 years in the making, a measured move would also last approximately 10 years. We’re in the 3rd year, so we have quite a ways to go yet. That being said, I wouldn’t just jump in headfirst. Wait for a pullback, especially to support levels or to a long term moving average (or sweeter still, the conjunction of both).

And if you’re a short term trader, put it up on your watchlist. It is almost in ‘free air’ territory again (meaning that every long is happy). We could have a breakout and long range day today if it breaks out of the mid-February resistance level.

Another way to play this is to not use the ETF (EWW) but to drill down to the components and find the strongest individual stocks and play those on the long side. The advantage is that you’ll get more beta for your bucks, but you’ll probably be stepping in much less liquid securities.

As I briefly mentioned about two weeks ago, there are two books coming out within a short period of time dedicated to the legendary ‘Turtles’. This weekend, I devoured the only one worth reading: Curtis Faith’s ‘Way of the Turtle’. My verdict? No serious student of the markets will miss this book.

The foreword of the book is written by Van K. Tharp and I was surprised to learn that Tharp himself was a finalist in the original Turtle ‘batch’. He never made it since he was more interested in the psychological aspects and in coaching traders, rather than being one himself.

Curtis starts the book by featuring his first trade as a turtle, a long trade in heating oil which won him not only praise from Richard Dennis but double the portfolio allocation of any other freshly hatched turtle ($2 million).

Although Curtis does go into some detail about the process of being interviewed and selected into the Turtles’ program, he moves quickly into new and exciting material. Way of the Turtle is tailored to those who are interested in learning about trading and the turtle trading methodology and not so much about the ‘inside scoop’ or drama of the turtles history, application and interview process, etc. Curtis succinctly summarizes the four elements all great traders possess:

• Trade with an edge
• Manage risk
• Be consistent
• Keep it simple

I found it reaffirming to find Curtis talking about the concept of R so matter of factly - which is a tribute to Tharp since ‘R’ has become an integral part of trading culture within only a few years after its introduction. But more interesting was Curtis’ introduction of a similar concept he calls ‘E’ or ‘E-ratio’. This refers to the effectiveness of entry into a trade, just as R refers to the result of a trade - measured by unit of risk.

In order to calculate it, you need two components: maximum favorable excursion (MFE) and maximum adverse excursion (MAE). You standardize them using the relevant ATR and then divide MFE by MAE. That gives you the ‘E-ratio’. This is an important number because it tells you whether your entry into trades has an ‘edge’. Think about it, if after entering a trade, usually the trade takes off towards the direction you want, with a small or almost nil adverse excursion, you know you’re on to something!

This is just one of the many gems contained in ‘Way of the Turtle’. It is a veritable treasurer trove for both systematic and discretionary traders. Equally impressive is the generous attention Curtis pays to the role of psychology and its effects on trading. All in all, this book is destined to become a classic.

Also don’t forget to check out Curtis’ blog