Peter L. Brandt is a seasoned, wildly successful commodity and foreign exchange trader; over a period of almost twenty years of active trading his prop funds have averaged a 68.1% annual rate of return. In Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading (Wiley, 2011) he both shares some of his guiding principles and lets the reader look over his shoulder as he plies his craft from December 2009 through April 2010.
Brandt uses high/low/close bar charts as his primary trading (not, he stresses, forecasting) tools. He is for the most part a longer-term discretionary pattern trader who enters on breakouts that meet his stringent requirements. Since he knows that only 30 to 35% of his trades will be profitable over an extended period of time and up to 80% will be unprofitable over a shorter time frame, he is exceedingly cautious about leverage. For instance, his trading assets committed to margin requirements rarely exceed 15%.
In the first two parts of the book Brandt offers the reader a thorough course in identifying and categorizing trading signals, placing initial protective stops and subsequent trailing stops, pyramiding, and taking profits. The course addresses traders at all skill levels. For instance, he describes his own trading plan as simple, but some of its elements require a degree of judgment and sophistication that can only come with extensive practice. One example: “time phasing is a hurdle all traders must clear in order to be consistently successful.” (p. 88)
The third part of the book is Brandt’s five-month trading diary, and it’s a fascinating read. Not only does it describe individual trades but it shows how good traders evolve. Take month four, where the author is in a drawdown period. He writes that he has always known that there were flaws in his trading plan but that “good times provide cover for the deficiencies of a trading plan.” During tough times “markets have a way of exploiting flaws in a trading plan. … The challenge is to find the fundamental flaws, not just to make changes that would have optimized trading during the drawdown phase. … Almost always the changes [the author has made to his own plan] have dealt with trade and risk management, not with trade identification.” (p. 189)
This time was no exception. If anything, it was more intense because of the book project. “Keeping a journal of trades and writing about them forced me to define, examine, and analyze my trading paradigm and algorithm like never before. … I reaffirmed myself in many of my trading practices. In some areas, however, I now believe I have the opportunity to make my trading plan more efficient and effective.” (p. 220)
Brandt’s Diary of a Professional Commodity Trader should be required reading for all traders. And that includes even day traders, whom Brandt considers a doomed breed. There are lots of tidbits that might spice up the reader’s trading plan and improve his bottom line. And, better than any book I have read before, it clearly demonstrates the necessary dialectic between staying true to one’s trading plan and improving upon it. This one’s a keeper!