Parness, The Art of Trend Trading

Michael Parness’s claim to fame is having turned “a relatively small amount of money into over $4 million” in 1999/2000 and roughly $13,000 into $3.8 million in 2008/2009 using mostly options and some futures and taking pretty big risks. Less publicized is the fact, to which he admits in this book, that he blew up his account on more than one occasion. The Art of Trend Trading: Animal Spirits and Your Path to Profits suggests a more “modest” goal for the reader, making about 1% a day. Compounded, that’s about a 500% annual return on your investment. Move over, all you hedge fund billionaires!

Parness outlines several paths to potential profit, most involving intraday trading. His model is the power trader , “someone who is capable of trading the market successfully throughout the entire day, and when desired, before and after regular market hours as well.” (p. 26)

His favorite plays, which he describes in some detail and from various perspectives, are gap fades, earnings runs, earnings straddles (long), FOMC fades, and the 10 a.m. rule (if a stock gaps up you should not buy it unless it makes a new high after 10 a.m.; if it gaps down, you should not short it unless it makes a new low after 10 a.m.).

Parness is at heart a trend trader because “trading in harmony with current trends rather than against them provides an additional edge that can result in a higher percentage of winning trades.” (p. 194) And so, although he often closes out all his trading positions at the end of each day, trading only intraday trends, “when a good reason justifies it,” he will “hold a stock or option position over a longer period of time.” (p. 40) Trends, he explains, are psychologically driven, which is why he hasn’t read very many books on the stock market but reads psychology books instead.

Although Parness’s firm, Affinity Trading, not only offers trader education but also sells stock and option plays of the week, this book is not an infomercial. And it’s evidence that reports of the death of day trading have been greatly exaggerated.

Newport, So Good They Can’t Ignore You

I recently finished reading and drafting a review of Cal Newport’s new book, Deep Work, scheduled for publication in early January. Since I won’t post my review until publication is imminent, I decided to dip into his earlier work, So Good They Can’t Ignore You: Why Skills Trump Passion in the Quest for Work You Love (Business Plus, 2012), which I can write about now, though I’ll be brief.

Newport debunks the passion hypothesis—that you should do what you’re passionate about because only then will you be happy in your job/career/calling. The problem, in a nutshell, is that for most people this hypothesis puts the cart before the horse. Passion is a side effect of mastery, not a precondition of it.

The craftsman mindset, Newport argues, is the foundation for creating work you love. The craftsman mindset focuses relentlessly on the value you’re producing in your job. By sorry contrast, the passion mindset focuses on the value that your job offers you. (The distinction is reminiscent of the famous words from John F. Kennedy’s inaugural address: “ask not what your country can do for you, ask what you can do for your country.”) In the former case, the craftsman mindset, you’re the subject of the sentence and are acting; in the latter, the passion mindset, you’re the object and are being acted upon.

As Newport writes, “put aside the question of whether your job is your true passion, and instead turn your focus toward becoming so good they can’t ignore you. That is, regardless of what you do for a living, approach your work like a true performer.” (p. 56)

Hirsch, Stock Trader’s Almanac 2016

The new year will soon be upon us, and with it comes the continuation of a long tradition. The Stock Trader’s Almanac is now in its 49th edition. Well, not quite the track record of The Old Farmer’s Almanac, which launched in 1792, but presumably a tad more data driven.

The spiral bound, green lexotone-covered almanac opens flat for easy access to its information or for jotting down notes. The format remains essentially the same as that of recent editions, with a calendar section, a directory of trading patterns and databank, and a strategy planning and record keeping section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only eight significant errors in 65 years, one of those in 2014), and the January barometer in graphic form since 1950. Each trading day’s entry on the recto pages includes the probability, based on a 21-year lookback period, that the Dow, S&P, and Nasdaq will rise. Particularly favorable days (based on the performance of the S&P) are flagged with a bull icon; particularly unfavorable trading days get a bear icon. A witch icon appears on options expiration days. At the bottom of each entry is an apt quotation. There’s about a five-square-inch space in which to write.

The Stock Trader’s Almanac pays particular attention to the presidential cycle, and its message is mixed for 2016. On the one hand, “election years are the second-best year of the four-year cycle and sixth years of decades have been up double digits four in a row, so 2016 has some solid history behind it.” On the other hand, “eighth year of presidential terms represent the worst of election years since 1920. In eighth years, DJIA and S&P 500 have suffered average declines of -13.9% and -10.9% respectively.” Admittedly, there are only six data points in this eighth year series (new to this edition), but of them only 1988 was positive.

What other seasonals are powerful? The best six months is still “an eye-popping strategy.” Since 1950 the best months are November, December, January, March, and April. Add February, “and an excellent strategy is born!” These six consecutive months gained 17,883 Dow points in 65 years, while the remaining May-through-October months lost 1066 points. In the last two years this pattern has been less “eye popping.” The DJIA gained 4.8% in 2013 and 4.9% in 2014 between May 1 and October 31 and 6.7% and 2.6% between November 1 and April 30.

As always, this year’s almanac is chock full of data that will delight traders who believe that past is prologue.

The turkeys arrived for their Thanksgiving dinner

I took this picture of deer and wild turkeys feasting in my back yard at dawn yesterday. A couple of turkeys flew into the vegetable garden, eating who knows what in the garden paths. When it was time for the turkeys to move on, one of birds in the garden was stymied. He/she had no idea how to get out and instead paced up and down along the fence, inevitably ending up in the corner. The turkey’s family briefly showed some concern but then abandoned the dullard. I finally went out to open gates, hoping that this might prove an avenue of escape. Obviously my presence and the clanging of metal was frightening enough to inspire the turkey to “get wings.”

Benjamin Franklin might have called wild turkeys “birds of courage” and proposed that the wild turkey, not the bald eagle, be the official animal of the United States, but this particular wild turkey exhibited neither courage nor any problem solving skills.

Happy Thanksgiving

Mellon & Chalabi, Fast Forward

I just received my copy of next year’s Stock Trader’s Almanac. The page I normally turn to first is the editor’s choice of best investment book of the year. I don’t think I’ve ever agreed with the choice, but I always note it in my review. This year it turned out that I hadn’t read the top pick, so I felt I needed to remedy that state of affairs. I set some time aside to read Fast Forward: The Technologies and Companies Shaping Our Future by Jim Mellon and Al Chalabi (Fruitful Publications, 2015). And although I admit I read it in a manner befitting its title, it was definitely worth the time I put in, and probably considerably more.

This seems to be the fifth book that Mellon and Chalabi have written. Their earlier efforts are Cracking the Code, Wake Up!, Top 10 Investments for the Next 10 Years, and Top Ten Investments to Beat the Crunch!

Fast Forward analyzes technologies in eight areas: robotics and automation; life extension; the internet of things; transportation; energy; payment processing; 3D printing; and media, publishing, education. Much of what they write is a summary of material that has been covered extensively in the media. But what is new and valuable is that the authors describe companies, both private and publicly listed, that are engaged in these technologies. It is therefore an idea book for technology investors. In the third appendix to the book they list the public companies chapter by chapter, along with the exchange on which they trade as well as their ticker and market cap.

Although I wouldn’t put Fast Forward among the best books I’ve read this year, for those who want to explore investing in burgeoning technologies it is a useful starting point.

Grimes, Quantitative Analysis of Market Data: A Primer

Adam Grimes’s brief book, Quantitative Analysis of Market Data (only 35 pages of text), which kindleunlimited subscribers can read for free, is indeed a primer. He starts with the formulas for percent return, both simple and logarithmic, and shows how we can standardize these returns for volatility, using ATRs, historical volatility, or the standard deviation spike tool (measuring each day’s return as a standard deviation of the past 20 days’ returns). He describes normal distribution, running mean, and running median for Cauchy-distributed random numbers.

The bulk of the book consists of an explanation of “three simple tools that should be part of every trader’s tool kit: bin analysis, linear regression, and Monte Carlo modeling.”

Traders who are familiar with the most rudimentary mathematical principles of finance will learn nothing from this book. But it’s a good place for the mathematically uneducated to start and a quick review for those whose grip on statistical modeling is tenuous.