Wednesday, August 26, 2015

Jewitt, FX Derivatives Trader School

Giles Jewitt’s FX Derivatives Trader School (Wiley, 2015) is a first-rate book, intended for serious, numerate readers. (And by ‘numerate’ I don’t mean math Ph.D.s, only those who don’t cringe at the sight of a few formulas.) It collects and expands upon monthly “Trader School” e-mails he sent to traders on the FX derivatives trading desk at HSBC, where he is currently employed as head of FX Options Automated Trading and eRisk. It covers everything from the basics, the volatility surface, and vanilla derivatives through exotic FX derivatives trading. Although it was written for junior FX derivatives traders and traders trying to expand or refresh their knowledge, it is also worthwhile reading for anyone who trades either currencies or options on underlyings other than currencies.

Jewitt has a knack for clarifying concepts that traders often rely on but don’t really understand. Take, for instance, the notion of a Wiener process (also called Brownian motion). “A Wiener process is a continuous stochastic process with stationary independent increments. Translating:

• ‘Continuous’ means ‘its path doesn’t jump.’
• ‘Stochastic’ means ‘it moves.’
• ‘Stationary’ means ‘its probability distribution does not change over  time.’
• ‘Independent increments’ means ‘each change does not depend on  any previous changes.’” (p. 61)

For those who can handle VBA, Jewitt includes a series of so-called practicals. He implores students and new traders not to cheat and download the spreadsheets available to those who buy the book unless they get completely stuck. The seven practicals encompass building a trading simulator, a numerical integration option pricer, and a Black-Scholes option pricer, generating tenor dates, constructing an ATM curve and a volatility smile, and generating a probability density function from option prices, all in Excel. (Dare I admit that I cheated?)

The chapter on vanilla FX derivatives risk management is especially illuminating, describing how good traders manage their positions. I was also intrigued by the discussion of ATM volatility and FX correlation, especially the ATM volatility triangles.

All in all, Jewitt’s book will probably take most readers’ knowledge of options trading (and certainly of FX options trading) up two or three notches. It’s worth investing the mental effort to work through the text.

Sunday, August 23, 2015

Roth, The Achievement Habit

Don’t try, do. Bernard Roth, professor of engineering and director of the Hasso Plattner Institute of Design (the at Stanford University, explains that there’s a big difference between trying to do something and actually doing it.

If you try to do something, it may or may not happen. If it does not happen, you might try using an altered strategy, and again it may not happen. Although this could go on indefinitely, usually it lasts until you luck out and succeed, get tired of trying, or get distracted by something else. Clearly this is a very unproductive way to go about your life.

If you are doing something, then no matter how many times you hit a barrier, or how frustrated your original strategy becomes, you intend to get the job done, and you bring to bear on it the inner resolve and attention necessary to fulfill your intention. (p. 77)

In The Achievement Habit: Stop Wishing, Start Doing, and Take Command of Your Life (Harper Business / HarperCollins, 2015) Roth offers advice on how to make achievement your habit. Achievement is not, it should be noted, an endless chase for more—more money, fame, appreciation, love. It’s about solving problems. In fact, Roth believes that “life is basically a problem-solving activity, and you can learn to make both the process and the result better.” (p. 166)

The book is full of anecdotes from Roth’s life, which has obviously been rich, one of personal and professional achievement. The anecdotes illustrate key points in his argument, such as nothing is what you think it is (and, a corollary, you give everything its meaning) and reasons are bullshit.

Although he is part of the STEM community, he downplays the effects of statistics on our lives.

Statistics can show you trends, they can’t predict your life. … the odds have always been against greatness. If one were to decide on a career path just by the odds of financial success, we would have no movie stars, authors, poets, or musicians. … If you succeed, the odds are meaningless. Any path may have a 2 percent success rate, yet if you’re in that 2 percent, there’s a 100 percent chance of success for you. The long shots are often the most rewarding. (p. 88)

Roth’s book is a call to action. It offers ways to get unstuck and start solving problems, to change your self-image (for instance, to think of yourself as being more creative), and to experience all that you can. It’s an enjoyable, uplifting read.

Saturday, August 22, 2015

Lohr, Data-ism

Before summer fades into fall, you might want to take a look at Steve Lohr’s Data-ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else (Harper Business / HarperCollins, 2015). It’s well crafted, the kind of book you would expect from a New York Times journalist--heavy on the backstory and potential implications of data collection and analysis, light on technology. But an interesting read nonetheless.

By the way, for those interested in exploring some basic techniques of analytics (with minimal math necessary), MIT offered an excellent course on edX called “The Analytics Edge.” It’s just wrapping up, but if it’s offered again, I can highly recommend it.

Wednesday, August 19, 2015

Cofnas, The Forex Trading Course,2d ed.

Abe Cofnas, the author of Sentiment Indicators, Trading Binary Options, and The Forex Options Course, has substantially reworked his 2008 book Forex Trading Course: A Self-Study Guide to Becoming a Successful Currency Trader for this second edition (Wiley, 2015).

The book’s three parts look at the fundamental drivers of the forex market, technical analysis for timing forex trades, and, putting it all together, paths to success in forex trading and a 100-question quiz. As something of an afterthought, there’s a chapter on trading bitcoin.

Cofnas’s book takes an “everything and the kitchen sink” approach, which means that it’s a wide-ranging, surface-skimming introduction to currency trading. For instance, the fundamentals of forex include not only the obvious—interest rates and interest rate expectations—but also housing data, which Cofnas argues is a leading indicator. Then we have inflation, reflation, and deflation; economic growth (job data, petrodollars); the China factor; the commodities connection; and business confidence and consumer sentiment. He briefly describes the personalities of the leading currencies. In the final analysis, in the chapter on conducting your own fundamental analysis, he recommends that the trader undertake a sentiment review by creating a “balance of fears” list. Sentiment, in his view, underpins both fundamental and technical analysis.

The section on technical analysis again discusses a range of topics, from Renko charts to Fibonacci levels, from the Commitment of Traders Report to technical indicators (moving averages, RSI, stochastics, Bollinger bands, STARC channels, linear regression channels) and chart patterns.

In a couple of paragraphs each he describes trading styles one can adopt in Forex trading: the bounce trader, intraday trader, trend trader, scalper, set-and-forget trader, carry trader, sudden-event trader, news trader, prophet, volatility trader, break trader, and Fibonacci trader.

The Forex Trading Course is not so much a training manual as a menu from which to choose areas for further study or consideration. Menus are valuable, but when disguised as education they are ultimately disappointing.

Sunday, August 16, 2015

Financial Planning Competency Handbook, 2d ed.

If you want to become a certified financial planner you must first complete the extensive CFP Board education requirements and then pass the CFP exam. In 2013 the overall pass rate was 63.3%.

The Financial Planning Competency Handbook, written primarily by academics who are also CFPs under the auspices of the Certified Financial Planner Board of Standards, serves two functions. First, it is a supplementary prep course for the exam. Those who buy the book have access to an online site with nearly 400 practice questions. And second, since I doubt that many people preparing for the exam master (or subsequently remember) all of the material a financial planner is expected to know, it is a useful reference for practicing professionals.

In a little over 900 pages the book covers 88 topics. A very brief sampling from the first, and by far the largest, part of the book: cash flow management, health care cost management, business uses of insurance, quantitative investment concepts, tax reduction and management techniques, gifting strategies, and estate planning for non-traditional relationships. Seven chapters deal with the client-planner relationship and developing, communicating, implementing, and monitoring financial planning recommendations. The last part of the book introduces readers to insights from other disciplines that can enhance the financial planner’s competence—for instance, behavioral economics, marriage and family therapy, and the psychology of decisions.

This is not a book you read cover to cover in a few sittings. But it’s a book that belongs on the shelves of everyone who gives (or sells) financial advice. Clients deserve well informed, high quality, professional service.

Thursday, August 13, 2015

Samuels, The Trader’s Pendulum

Sometimes I have the feeling that I’m reading the same book over and over again. These books have different titles and different authors but say basically the same thing. I had that feeling with Jody Samuels’ The Trader’s Pendulum: The 10 Habits of Highly Successful Traders (Wiley, 2015).

Samuels is the founder of the FX Trader’s EDGE Coaching Program. As a promotion, she is offering a free 30-minute coaching session to those who purchase the book.

Perhaps one reason that books on how to act like a successful trader are so similar is that successful traders do in fact have similar routines. These routines may not be the sole reason they are successful (in fact, I’m sure they’re not), but without some of them at least, they probably wouldn’t be successful.

Samuels stresses that people should treat trading as a business and that, habit #1, they should establish their trading business for the right reasons. As habit #2, they should complete a business plan and, #3, define their goals. I’m not sure any of these actually qualify as habits, nor am I convinced they are essential first steps, but they can launch the process of acting like a trader.

Habit (or action) #4 is self-serving: commit to your education with a trading coach.

Habits ##5-8 are commonplaces: understand and exploit your unique trading personality, follow a system, plan the trade and trade the plan, and measure your performance.

To round things out, Samuels suggests that people learn the secrets of successful traders and that they add balance to their lives.

The strength of this book lies not in its to-do list but in its storytelling. Fred and Stacey are the fictional protagonists of the book. Fred exemplifies the ways we go astray in trading. Stacey is the entrepreneurial trader who illustrates how we should act if we aspire to join the ranks of the highly successful. It’s in these stories that readers will find the most useful advice. When, for instance, should traders stubbornly follow their plans, when should they be flexible? What should traders do when the market becomes narrowly rangebound?

For novice traders, Samuels’ book offers a lot of sound advice. For more experienced traders who haven’t yet joined the ranks of the highly successful, it’s a useful quick review. For jaded book reviewers, it’s—meh.

Sunday, August 9, 2015

Steinmetz, The Richest Man Who Ever Lived

Well, maybe. The other day I read that Mansa Musa, who ruled West Africa’s Malian Empire in the Middle Ages, was the richest person in history, with a personal net worth of $400 billion at the time of his death. Greg Steinmetz’s The Richest Man Who Ever Lived (Simon & Schuster, 2015) isn’t about Mansa Musa, however, but about Jacob/Jakob Fugger (1459-1525), the groundbreaking banker and mining magnate from Augsburg, Germany.

In support of his “richest man” claim, Steinmetz used a metric that he admits is flawed: comparing a person’s net worth with the size of the economy in which he operated. An alternative method, measuring Fugger by his worth in gold, “a method that has the virtue of adjusting for inflation, chops him down to a mere $50 million, making him no wealthier than, say, a successful real estate developer or a multilocation car dealer. That’s not right either.” (p. 202)

Fortunately, for the merit of Steinmetz’s book--which is quite a good read, especially for anyone interested in economic history--Fugger’s rank among the richest really doesn’t matter. Fugger was important not only because he was so rich but because he helped make lending a mainstream capitalist tool and because he was influential in shaping European politics.

Steinmetz summarizes Fugger’s business career:

Fugger had a remarkable talent for investing. He knew better than the rest how to size up an opportunity and where to park his money for the best return at the least risk. He knew how to run a business and make it grow and how to get the most out of his people. He knew how to exploit weakness and negotiate for favorable terms. But perhaps his greatest talent was an ability to borrow the money he needed to invest. (p. 66)

He borrowed by offering savings accounts to big depositors. It was a potentially treacherous course to follow because a single withdrawal could ruin Fugger if he didn’t have the available cash on hand. But the risk/reward ratio was favorable. He paid his investors 5% a year and targeted a 20% annual return for himself, a handsome 15 percentage-point spread.

The church, however, banned usury—charging interest, any interest not just exorbitant interest, on loaned money. In its ban Rome appealed to Luke 6:35: “Lend and expect nothing in return.” In fact, the usury debate went back at least as far as Aristotle, who said that “it was fair to charge someone for a cow because a cow produced milk. But money was sterile. It produced nothing. Therefore it was unfair to charge someone for money.” (p. 88)

Moneylending was a highly profitable undertaking, and yet Christians who engaged in it were going against the dictates of the church. Which, of course, didn’t mean that they refrained from lending money, just that they did their best to disguise it. Fugger, however, wanted lending (and banking) to be a theologically acceptable practice. He signed an agreement with depositors, the Augsburg Contract, that promised them an annual return of 5%. And he then went to great lengths to have Pope Leo declare the contract legitimate.

Finally, Leo signed a papal bull that said: “Usury means nothing else than gain or profit drawn from such a thing that is by its nature sterile, a profit that is acquired without labor, cost or risk.” (p. 93) With the stroke of a pen Leo made lending money lawful in the eyes of the church since every loan involved either labor, cost, or risk, sometimes all three. “As long as a loan passed that easy test, the lender was off the hook. Fugger’s lobbying had paid off in spectacular fashion. He and others were now free to charge borrowers and pay depositors interest with the full blessing of the church. Leo’s decree, issued in conjunction with the Fifth Lateran Council, was a breakthrough for capitalism. Debt financing accelerated. The modern economy was under way.” (p. 93)