Sunday, July 24, 2016

Garner, Higher Probability Commodity Trading

Carley Garner, a commodity market analyst and broker at DeCarley Trading, is also a seasoned author. She previously wrote A Trader’s First Book on Commodities, Currency Trading in the Forex and Futures Markets, and Commodity Options.

Higher Probability Commodity Trading is, as the subtitle explains, a comprehensive guide to commodity market analysis, strategy development, and risk management techniques. It covers pretty much everything you need to know to start paper trading commodity futures and options. Or to decide that you’d better stick to stocks and bonds.

The first section, focused on analysis, deals with the basics, technical analysis, fundamental analysis, seasonal tendencies, sentiment, and intermarket correlations. The second section, on trading strategy development, looks at position trading, day trading, and algorithmic trading in futures, futures spread trading, options strategies, managed futures, constructing a commodity portfolio, and using futures and options as a hedge. The third section introduces the reader to e-micro and mini futures contracts and VIX futures. The final section offers some tips and tricks, explains commodity brokerages and trading fees, outlines a few risk management techniques, and describes mean reversion and delta neutral options trading. The book, in brief, is packed with information.

The novice will struggle with some of the chapters, the experienced trader can skim through others. But there’s something here for every level of trader, which is rare for a broad-based book.

Interest in commodity trading is about as cyclical as commodities themselves. Traders jump on the band wagon when they think a commodity is hot. But few prepare themselves properly. Trading is trading, they think. Trading CL is like trading AAPL. Trading GC options is like trading SPY options. No, no, a thousand times no. Anyone who contemplates putting money to work in the commodity markets has to understand that he is operating in an entirely different world. Otherwise, he can expect to have his head handed to him.

Garner does an excellent job of explaining what it takes to succeed in commodity trading. The reader will, of course, have to map his own course. Not everyone, for instance, is comfortable selling unhedged options. But from the many ideas Garner offers, the reader should find something worth pursuing further.

Sunday, July 17, 2016

Polk, For the Love of Money

If you are eagerly expecting to read yet another Wall Street tell-all book, you’ll be sorely disappointed in Sam Polk’s For the Love of Money (Scribner, 2016). It is the memoir of a self-sabotaging young man who has a destructive relationship with his father. At the age of eight he is thrilled to get a dog and ends up killing the poor thing by leaving him in the family’s stiflingly hot car. He fights with bullies. By the time he is in college, at Columbia, he is drinking too much, doing too many drugs, and (early on) suffering from bulimia. He gets suspended for a semester for breaking into his drug dealer classmate’s dorm room. Women come and go, as do jobs, usually dramatically. We’re almost halfway into the book and Wall Street is nowhere.

Visiting the family of one of his girlfriends, our anti-hero is impressed with her father’s power job and money and is inspired to start building toward a life like his. He applies for summer internships in the trading department of every investment bank, but with a sub-3.0 GPA and a resume “littered with half-truths and obfuscations” he is an unlikely candidate. Nonetheless, in 2002 (and page 101 of 232), he gets an internship at CSFB. He breaks up with his girlfriend, stops drinking and taking drugs, and doesn’t get offered a permanent job. Finally, he is accepted into the Bank of America analyst class of 2003, finds a father figure at the bank, transitions to the trading floor, and eventually moves from Charlotte to New York.

A tiny section of the book is devoted to the tensions of bond trading (the rocky Verizon bond issuance is particularly interesting), but Polk doesn’t linger over anything that gets in the way of recounting his own personal transition from fear and rage to charity and “redemption.” When he leaves Bank of America, voluntarily, after a devastating trade (he “had overlooked an important variable when [he’d] constructed [his] portfolio—the difference between how bonds and derivatives perform in a funding crisis”) to accept a million dollar job at Pateras Capital, it is the beginning of the end of Polk’s trading career. He loses faith in the system even as it is an argument over his bonus that eventually leads him to walk out the door.

He waxes populist. “Our obsessive accumulation of money had led to the widest inequality in centuries. Our hoarding had left millions of people unemployed, starving, and marginalized. Prison populations were swelling; families were starving. Our greed was the source of that poverty. We were the source of that marginalization.”

“It’s not where you are but who you are” may never have made it to a poster. But it may be a way to sum up my attitude to this book. Polk had a knack for making the worst of the many opportunities he was offered, and the financial world shouldn’t be unfairly vilified because it couldn’t solve his personal problems. It’s got enough problems of its own.

Wednesday, July 13, 2016

Ponsi, Technical Analysis and Chart Interpretations

Books on technical analysis, with few notable exceptions, have pretty much become commoditized. Ed Ponsi’s Technical Analysis and Chart Interpretations: A Comprehensive Guide to Understanding Established Trading Tactics for Ultimate Profit (Wiley, 2016) is unfortunately not one of those notable exceptions. It is a clearly written, well balanced introduction that checks all the right boxes, but it breaks no new ground.

Ponsi’s expertise is the forex market. He is the author of Forex Patterns and Probabilities (2007) and The Ed Ponsi Forex Playbook (2010).

In this book, however, he focuses on equities. In a little over 350 pages he deals with such topics as support and resistance, trends and trend lines, volume, gaps, price patterns, candlestick patterns, Fibonacci techniques, technical indicators, point and figure charting, cycles, and sentiment indicators. He illustrates these topics with ample black-and-white charts.

Someone new to technical analysis would, I believe, find Ponsi’s work to be a useful textbook. For those who already incorporate technical analysis into their trading and/or have read two or three decent books in the field, it is not a must-have addition to the library.

Sunday, July 10, 2016

Bulkowski, Chart Patterns: After the Buy

Thomas Bulkowski has been researching chart patterns for years. His Encyclopedia of Chart Patterns was first published in 2000 and became an instant classic. Since then he has written several more books on trading and chart patterns, including Trading Classic Chart Patterns, Getting Started in Chart Patterns, Encyclopedia of Candlestick Charts, Visual Guide to Chart Patterns, and a three-volume series on the evolution of a trader.

Chart Patterns: After the Buy (Wiley, 2016) is, I believe, his best book yet. He looks at 20 popular chart patterns and analyzes, using 43,229 case studies, how they tend to play out. One qualifier: he studies the behavior of these patterns only during bull markets. That is, he is excluding the periods from March 24, 2000 to October 10, 2002 and from October 12, 2007 to March 6, 2009.

Most chapters follow the same (dare I say?) pattern: behavior at a glance, identification guidelines, buy and sell setups, best stop locations, configuration trading (that is, how the setup is likely to behave), the measure rule (for setting targets, and how likely they are to be reached), trading examples, and setup synopsis charts.

Bulkowski covers the most familiar chart patterns, such as double tops and bottoms, flags and pennants, head-and-shoulders tops and bottoms, measured moves, rectangles, and triangles. But he also looks at patterns that are less obviously visual, such as the behavior of stock prices after an earnings miss.

Bulkowski’s statistics can be sobering, though again we have to remember that he is dealing only with bull markets. Topping reversal patterns that might have some efficacy in bear markets will be more prone to fail when markets are moving to the upside. For instance, unconfirmed double bottoms fail 44% of the time whereas unconfirmed double tops fail 53% of the time. Admittedly, neither statistic is heartwarming, but a bull market regime obviously favors double bottoms.

The author offers specific recommendations on how to trade each pattern to improve the odds of a successful outcome. In the process, he gives what amounts to a mini-course in trading in general.

Although statistics (and good computer programming) is at the core of Bulkowski’s research, he writes remarkably clear, sometimes even breezy prose. And he includes lots of illustrative charts.

Chart Patterns: After the Buy is a reference book that belongs on the shelf of every trader who thinks he can see something in the squiggles of price movement. And, in one way or another, don’t we all?

Sunday, July 3, 2016

Orrell & Chlupatý, The Evolution of Money

We’ve been on this journey before, but writers keep returning to the fascinating story of money. In The Evolution of Money (Columbia University Press, 2016) David Orrell and Roman Chlupatý offer a new take, one that is more conceptual than historical, one whose final chapter is titled “Utopia.”

First, on a purely historical note, they set the record straight about the origin of money. It is not the case, as is commonly accepted, that money arose out of a barter economy. “Coin money did not supersede barter; rather it was predated by state-backed systems of credit. And rather than emerging naturally, with government and its legal system only stepping in at the last moment to claim credit by putting its stamp on everything, the use of coin money was imposed by government in the first place. It was forced on the population….” (pp. 28-29)

Money, they argue, is inherently dualistic and reflects the unstable relationship between number and value. Moreover, the history of money oscillates between periods of virtual and physical money. “During a virtual phase, money is seen primarily as mathematical debt—a score in a ledger—while in a physical phase, money is seen primarily as material wealth. However, the two sides cannot be separated, so money always retains the essential characteristics of each.” (p. 54)

The authors use this dualistic framework to trace attitudes toward money over time. For the most part they reorganize the familiar in a new way. But, in describing the cycles of virtual and physical money, they sometimes wander off in strange directions.

Here’s one instance. They claim that “the psychology of money … has much to do with our attitude toward femininity. For example, it is often said that market behavior is driven by the twin emotions of greed and fear. These responses both shape and are programmed by our scarcity-based monetary system. But while they have been treated as normal by economists … psychologists might argue that there is something else going on. In his book The Mystery of Money, Bernard Lietaer points out that this fear, which affects so much of our economic life, is related to our repression of the life-giving abundance of the feminine principle.” (pp. 115-16)

And a few paragraphs earlier: “Today, currencies such as the dollar and pound, with their Federal Reserve and Old Lady of Threadneedle Street, are in a state of transition. They retain many of the trappings and pretensions of their old scarcity-based, gold standard versions, but in fact are completely virtual. They are male-principle virtual currencies dressed up as female-principle physical currencies—money in drag.” (p. 114)

At its best, the authors believe, “money is virtual and can exist in a variety of forms.” (p. 195) Once we accept this view of money, they argue, our attitude to it changes. For instance, ”the strongest impediment to basic income is psychological—it seems unfair to give scarce funds away for nothing. But if basic income were delivered using a complementary currency, similar to Alberta’s old Prosperity Certificates, it would be more clear that the funds represent a kind of birthright.” (p. 195)

I appreciate the authors’ agenda, and I have no doubt that we will see a range of currencies, mostly digital, in the future as well as an increase in non-monetary transactions (such as gifting and, sometimes, sharing). I also think they are correct in predicting that “some of the most interesting [social, intellectual, and economic] developments will take place in the areas that are least well-served by our conventional money system, where the gap between number and value is the greatest.” (p. 236) But since money can never shed what the authors see as its inherently dualistic nature, even they concede that “money will continue to be a source of human drama and tension, no matter what form it takes.” (p. 237)

Wednesday, June 29, 2016

Pruitt, The Ultimate Algorithmic Trading System Toolbox

I am in the process of learning to code in Python and am, I must admit, no programming genius. So I was delighted to see that George Pruitt, best known for his book on TradeStation’s EasyLanguage (Building Winning Trading Systems with TradeStation) had written a new book that covered not only the TradeStation platform but also AmiBroker, Excel (with VBA), and Python. The Ultimate Algorithmic Trading System Toolbox: Using Today’s Technology to Help You Become a Better Trader (Wiley, 2016) is a how-to manual for the non-quant who wants to incorporate algorithms into his trading.

Pruitt’s focus in this book is not so much on system development per se as it is on popular programming tools for building and back testing technical trading systems. Yes, he has chapters on “Genetic Optimization, Walk Forward, and Monte Carlo Start Trade Analysis” and “An Introduction to Portfolio Maestro, Money Management, and Portfolio Analysis,” but what will most likely draw traders to Pruitt’s book is his extensive array of clearly explained sample code.

His examples of input into technical trading systems are drawn from the usual suspects, such as Bollinger bands, Keltner channels, MACD, RSI, stochastics, and various moving average indicators. More important, he shows traders who don’t use comprehensive platforms how to write system testers. He developed his own bare-bones Python and Excel testing engines. A website accompanying the book includes this software, with all its source code, as well as source code that can be run in TradeStation and AmiBroker. Unlike much of the Python code that is available online, Pruitt’s actually seems to be error-free. I didn’t test his other code.

One of Pruitt’s aims in this book was to offer “the most important and simplest programming techniques to transform a non-quant into a not-so-non-quant.” He has, I believe, succeeded admirably.

Sunday, June 26, 2016

Roze, Tensile Trading

Tensile Trading: The 10 Essential Stages of Stock Market Mastery by the father-son team of Gatis N. Roze and Grayson D. Roze (Wiley, 2016) is a wide-ranging book that will be of particular value to those who are fairly new to active investing. Or those who have not been as successful as they would have liked and want to start over.

The book is organized around a ten-step process: money management, the business of investing, the investor self, market analysis, routines, stalking your trade, buying, monitoring, selling, and—finally—revisit, retune, refine.

One imperative that gets repeated in many contexts is: Put it in writing! The authors stress that in business (and investing should be treated as a business) “documentation is the centerpiece of effective organization and operation.” The investor should document and regularly update his business plan. He should also keep a daily journal. Another suggestion is to take observational notes (on notepads or via smartphone). “Opportunities surround us in abundance if we open ourselves up to them…. [S]mall, brilliant little gems present themselves in the most unlikely situations. It is uncanny how often these observations translate into profitable investment decisions somewhere down the line.”

Once an investor has identified a stock in which he is interested (and the authors suggest a process for making this identification) and is prepared to execute a buy order, he should not go all in. Rather, he should use the strategy of pyramid trading, buying only a percentage of the desired total investment and letting the market prove him right before he buys more. The authors’ recommendation is to pyramid into long positions using 25%-35%-40% progression and to pyramid out using a reversed 40-35-25 sequence, “which reflects the fact that prices tend to fall faster than they rise.” Using this buy strength, sell weakness method, “if the trend pushes higher, the market has reinforced your good judgment and handed you some profit as a reward. If the trend reverses, your stop is executed, your risk is limited, and you book a small loss on only 25 percent of your full intended position rather than a larger loss on its entirety.”

Tensile Trading frequently drills down into specifics. For instance, it describes a personal selling paradigm that monitors price relative, trend, volume, momentum, bearish patterns, and personal money management rules and that is illustrated with color charts from StockCharts.com, where Grayson Roze serves as business manager.

But at its core Tensile Trading sets out to delineate a framework in which to thrive as an active investor, no matter what particular strategies and tactics the investor develops and pursues. And this it does very well.