Anne-Marie Baiynd is a thoroughly engaging writer. The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology (McGraw-Hill, 2011) may not be the greatest thing since white bread, but it’s a darned good read.
As the subtitle indicates, the book moves between the nuts and bolts of a discretionary technical trading plan and—dare I go there?—the nuttiness of the unprofitable trader. She walks the reader through a series of trades that, in their full complexity, rely on analyzing candlesticks, moving averages, Fibs, and Bollinger bands. And she proves that one can actually describe trades in clear, cogent prose. The discretionary trader who uses some or all of these tools will learn their subtleties. The person who doesn’t know what tools to use will get a good sense of how to begin to structure trades, piece by piece.
In this review, however, I’ll focus on a couple of psychological takeaways from the book.
Let’s start with the trading journal—that thing that every trader knows he should keep and yet so few do. The author admits that initially she herself put the task of creating and using a trading journal on an “I’ll eventually get around to that” list. She writes: “I resisted the urge early on because it seemed like a lot of work that would actually interrupt my trading, then I resisted because I did not know what to write down, then because I felt a bit lazy, and then because the last thing I wanted to do was review horrifying trades to remind me about how bad I was.” Eventually she came to the realization that “what I had been doing had given me what I had gotten, and since I didn’t like the state I was in, writing a trading journal (as well as a lot of other changes) started looking really good to me.” (pp. 135-36)
She recalls that “the months of journal writings chronicling major defeat were gut-wrenchingly emotional, ramblings of a trader at her wits’ end, but every day I just kept coming back. About every six weeks, I’d break them out and read over the past trades, and though the queasy feeling stayed reading many of them, it was invaluable—like a road map in the dark and a chance to review actions with a mind no longer clouded by the emotions of that day. Reading my old trades and talking them out loud was critical to my advancement as a trader.” (p. 142)
One of the things that traders have to confront in their journals is the incredible difficulty of sticking to their system or plan. “Trading is a bit like this. We are playing a game where we have, let’s say, three doors from which to choose. Behind the first door is a man wearing a set of brass knuckles, and he’s waiting to deliver a shot to the face; the second door is our brokerage firm, which will take a transaction fee for simply opening then closing the door; and the third is a lovely knapsack full of Benjamins. Every time we open a door and close it, our items shift around between doors.” (And you thought we were simply dealing with the Monty Hall problem!) We have a system that is very reliable if well executed. So we put on our first trade, choosing door number one. We encounter “Knuckles”—definitely no fun. Our next trading signal sends us to door number one again. Do we really want to open that door again? Of course not. But we muster up the courage and open the door, unfortunately later than we should have—“and there’s Mr. Broker fleecing our pockets.” You get the picture.
Baiynd continues: “If we choose to day-trade or to swing-trade … , the scenario just described is a large measure of our daily existence, and how we fare has far more to do with our abilities to follow direction, address fear, and manage our exposure than any system out there.” (pp. 48-49)
Since we’re all to varying degrees flawed traders, reading some of the ways to confront our failings is an important first exercise. The Trading Book makes that exercise exceedingly palatable.