Saturday, November 7, 2009

Patel, Technical Trading Systems for Commodities & Stocks

Charles Patel’s Technical Trading Systems for Commodities & Stocks (Traders Press, 1998 [reprint of the 1980 edition]) is a collection of 82 trading systems. Naturally, there are not 82 conceptually different trading systems. For instance, in some cases a trading system is branded “new” when a filter is added to a previous system. But there’s a more generous assortment of trading systems than most books offer.

What is particularly useful about this book is that in every case that a system can be quantified Patel provides precise arithmetical steps to generate the indicator; he also spells out the buy and sell signals. Even though the book was written before the launch of Excel and the work sheets are painstakingly typed (how spoiled we’ve all become), anyone with even the most elementary knowledge of Excel can easily follow the “system definitions” to produce a spreadsheet.

I realize that many of these indicators are included in technical analysis software packages, so traders don’t bother to learn how they are calculated. Well, that’s only one step up from black box trading. It’s important to know what you’re pinning your hopes on! Here indulge me on one of my pet peeves. Many people maintain that using canned indicators is like driving a car; you don’t have to know how a car works in order to drive it and you don’t have to know how an indicator is constructed in order to use it. But what happens if the car breaks down in the middle of nowhere—picture yourself in an old VW bus in the Gobi Desert (I’m transporting you back to the pre-computerized service era driving one of the most unreliable vehicles)--and you’re all on your own? If you’re savvy and it’s a duct-tape kind of fix, you’ll live to drive another day. What happens if your favorite indicator breaks down? If you know how it’s constructed, sometimes a tweak will get it up and running again. But you can tweak it only if you know what “it” is. The sophisticated folks who are trading adaptive systems and dynamically hedging presumably know what “it” is or at least have a mechanic an arm’s length away. The independent investor or trader is on her own, in the Gobi Desert, and has to be her own mechanic. In the case of most of Patel’s systems, she could have stopped her math education in the fourth grade and still survive. So no excuses!

Now that I’ve vented, let me break up this post with a very funny
VW bus ad. Earlier I recounted my college African trip (and my first investment); one of the few things I brought back because I loved it was a 45 record of “Ag Pleez Deddy!” Since it no longer plays on anything even remotely resembling a “record player,” I was in search of an online download. The closest I could find was Jeremy Taylor’s 2007 very abbreviated redux and the VW knock-off.

Back from memory lane to potential here-and-now investor/trader-focused edges. Patel’s book may not be the latest and greatest, but he offers some strategies that have flown under the radar screen and on first blush may have potential. He gets you under the hood; he has an appreciation of what might work more often than not. This book is infinitely more valuable than all the “weekend camp” junk you can spend thousands on.

As I’ve said before about Traders Press books, if you’re interested in buying any of them compare the price on their web site with the price on Amazon; you’ll usually save a boatload of money if you go direct to the source.

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