Monday, January 10, 2011

Bernstein, The Compleat Day Trader, 2d ed.

The dust jacket of Jake Bernstein’s The Compleat Day Trader: Trading Systems, Strategies, Timing Indicators, and Analytical Methods (McGraw-Hill, 2011) states that this second edition of the book that first appeared in 1995 is “revised and fully updated for today’s volatile markets.” Actually, it has been completely rewritten. So, although it’s telling to see what has been omitted from the strategy and indicator sections of this second edition (for instance, stochastics are gone), it’s best to view this book as a brand new contribution to the literature on day trading.

Bernstein is a discretionary trader in the sense that he believes that “the emphasis must be the development of simple but repetitive and reliable market relationships as opposed to systems per se.” (p. 39) Put another way, he stresses the development of trader skills rather than system development.

Bernstein offers a few simple but potentially powerful technical indicators. First, there is the moving average channel, based on the principles of support and resistance combined with market trend. This indicator uses a simple moving average of price highs, a different moving average of price lows, and Williams AD as a trigger or confirmation. (You really didn’t think I’d give you all the formulas in a book review, did you?) It is not, however, a strictly mechanical trading method; it requires the trader to use some judgment.

Second (and admittedly not a technical indicator) are plays for CNBC addicts, the media day trades. Bernstein then considers momentum and MACD divergence trades. His favorite method, to which he devotes yet another chapter, revolves around trading with gaps. And finally he offers the eight open, eight close method based on the eight-bar moving averages of the open and close.

Of particular value for the day trader is the chapter on profit-maximizing strategies in which Bernstein discusses various strategies for placing stop losses (and underscores the importance of sufficiently large stop losses), profit targets, position sizing, and the equity curve filter.

Bernstein was trained in clinical psychology and is the author of the popular The Investor’s Quotient. It is not surprising, therefore, that he considers “the single most important aspect of any trading methodology” to be “the psychology of the trader.” (p. 189) His chapter on the psychology of day trading focuses on behaviors and qualities that either enhance or limit trading success. Examples of the former are discipline and persistence; of the latter, overtrading and beginning with insufficient capital. The former are behaviors and qualities that all successful traders share; the latter are some of the ways that traders fail. Those who want an analysis of and potential remedies for the specific psychological baggage they bring to trading will have to turn elsewhere.

The Compleat Day Trader is a good book for the beginning or the not yet profitable trader. It also serves as something of an annotated checklist of elements that go into making a good trader. And we know the incredible power of checklists. Just read (or re-read) Atul Gawande’s piece in The New Yorker from 2007 or his 2009 book The Checklist Manifesto: How to Get Things Right.

1 comment:

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