Monday, November 1, 2010

Tatro, Trade the Trader

The key argument of Quint Tatro’s Trade the Trader: Know Your Competition and Find Your Edge for Profitable Trading (FT Press, 2010) is that since average investors have flocked to technical analysis “you must be willing to trade on the failure of these patterns to exploit the crowd’s movement for your own benefit.” (p. 32)

Tatro simplifies patterns, reducing them to lateral trends and angular trends (though he does reference such well-known patterns as the head and shoulders). Trend lines provide a guide for the trader to either go with the trend or trade a trend break. Often these basics will work. But, Tatro writes, “The problem for most investors is that their belief about what technical analysis is ends with the basics when it should, in fact, just begin there. If at its core technical analysis is the graphical representation of traders’ emotions and now most of those traders are seeking to capitalize by using basic technical analysis, your goal is no longer to assume the basics will always work. Instead, you must sometimes be able to alter your strategy to trade the traders who are trading the basics.” (p. 81)

This book devotes a lot of space to such fundamentals as pattern recognition, picking your time frame, developing your plan, using and controlling risk, and dealing with emotions. It explains a way to determine entry points and how to set stops. Only then does Tatro embark on describing how to trade the trader. We know the saying that from failed moves come fast moves. The challenge, however, is to distinguish between situations that will lead to expected moves and those that will result in failed moves.

Tatro admits that trading pattern failures “can be a dangerous game,” especially for those who try to anticipate failures. He says that it has been his experience that “trading pattern failures is best done only after the traditional pattern has in fact failed, thereby giving you a clear level from which to place your stop.” (p. 144)

Trade the Trader is a well-crafted book from which beginning traders can obviously profit. But even those with more experience can learn from Tatro’s ability to simplify—and in the process clarify—trading patterns and market sentiment.

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