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Psychology and Gaining Confidence

CONFIDENCEThere has been a lot of talk on the  psychology of trading and getting rid of fear etc. I think that one way to help is to understand the performance parameters of your trading system and this means extensive  backtesting and changing the way you think when entering a trade.

Now whenever I have placed a trade I have assumed that I was wrong and so if the market did not immediately prove my position correct I would be taking measures to reduce my position and, if necessary, get out. This kept my losses small and when correct I was able to do nothing and just move my stop up. This is contrary to the way most people trade in that they place a trade assuming they are right and wait for the market to prove them wrong.

IAlso if you have backtested a system thoroughly you will know what percentage of profitable trades you can expect. From this you can also determine the number of consecutive losing trades that you can expect for a given number of trades. The formula is quite straight forward and is:
Consecutive losses = LN(N)/-LN(S) where
N = Number of expected trades
S = (100-strike rate %)/100 (more…)

Ten Anecdotal/Historical Book Ideas for Investors

About a month or so ago, I finally got around to reading Marty Schwartz’s classic, Pit Bull, which I can best describe as a colorful autobiography that uses the 1980s options world as a palette for many amusing anecdotes that are expertly conveyed. The book was such a fun read that I went through the whole thing in no more than 2-3 days, cobbling together bits and pieces of ‘free time’ in order to do so.

 

Schwartz’s book is pure entertainment and touches only briefly on methodologies and techniques, yet I was able to pull quite a few investment-related nuggets from it in a short period of time, with the added benefit that the learning process was all fun and no pain. The process got me thinking that perhaps the fastest way to effortlessly bombard the brain with useful investment ideas are those easy reads that provide a personal historical window into the markets.

 I am contrasting this process with the process I went through in trying to read and digest the ideas in Alan Farley’s The Master Swing Trader, which, despite the many interesting ideas, is about as fun to trudge through as Hegel.

 With this in mind, I offer the following ten books as relatively effortless ways to cross-pollinate your investment thinking with that of some of the better minds in the field, both past and present.

 Roughly in order of how quick and easy they are to read:

  • How I Made $2,000,000 in the Stock Market (Nicolas Darvas) – You can probably read this book in a little over an hour. There are only a few salient ideas, but these are destined to stick with you long after you have read the book. I also found that the path Darvas took along the way to developing his system bears a strong resemblance to my own.
  • Pit Bull (Marty Schwartz) – A fast-moving and superbly written account of a champion options trader. A great companion for a cross-country plane trip.
  • Reminiscences of a Stock Operator (Edwin Lefevre) – This is on almost everyone’s reading list, so I will say little about it, other than to point out that it is chock full of insight, yet still reads like a novel.
  • A Journey Through Economic Time (John Kenneth Galbraith) – A very different book from the others on this list, this is certainly one of the easiest economics reads out there, yet the survey of the economic landscape from WWI to after the fall of the Berlin Wall will give the reader a lot to think about.
  • My Life as a Quant (Emanuel Derman) – Another physicist who writes extremely well, Derman provides a thoughtful accounting of his personal journey through the (then) unlikely intersection of theoretical physics, finance and risk.
  • Investment Biker (Jim Rogers) and Adventure Capitalist (Jim Rogers) – These two books are probably best read back to back, in chronological order, starting with the Investment Biker’s 1990-1992 world tour, then using the 1999-2001 Adventure Capitalist jaunt to see how the world had changed over the course of a decade. This is first-person global macro analysis at its best, though you may not have the stamina to do your own world tour in one sitting…
  • Market Wizards (Jack Schwager), The New Market Wizards (Jack Schwager), and Stock Market Wizards (Jack Schwager) – I never thought I’d willingly place the Schwager wizards trilogy at the bottom of any list, but they end up here because they are more densely packed than the other books. Like the Jim Rogers duo, these are best consumed in small bites, on an empty stomach, leaving ample time for proper chewing and digestion. Schwager’s interview style and editing is such that he is able to deliver an astonishing amount of information in an easy to read fashion. The best news of all is that while the books are a great place for beginners to start, they somehow manage to improve with repeated reading.

Sviokla & Cohen, The Self-Made Billionaire Effect- Book Review

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Becoming a millionaire, even a multimillionaire is not all that extraordinary, becoming a billionaire is. What do self-made billionaires (and there are about 800 of them in the world) have that the rest of us don’t? John Sviokla and Mitch Cohen tackle this question in The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value (Portfolio / Penguin, 2014).

These billionaires (or Producers, as the authors call them) may be wired differently. They certainly think differently. They balance judgment and imaginative vision, a daunting mental task since “for most people, judgment and imagination sit on opposite ends of a mental spectrum. The more skilled one is at seeing things as they are (judgment) the harder it is to see things as they might be (imagination).“ (p. 4) Not only do they “revel in bringing clashing elements together,” “they seamlessly hold on to multiple ideas, multiple perspectives, and multiple scales.” (pp. 16, 15)

Since they “cannot predict the exact time to make an investment, … they are willing to operate simultaneously at multiple speeds and time frames. They accept that timing is not under their control, and so they work fast, slow, super slow, or in all these modes at the same time. They urgently prepare to seize an opportunity but patiently wait for that opportunity to fully emerge.” (p. 19)

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