Monday, November 14, 2011

Weissman, Trade Like a Casino

Richard L. Weissman, the author of Mechanical Trading Systems (2004), has a new book out: Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House (Wiley, 2011). It’s a well-balanced book that incorporates trading ideas, risk management, and trader psychology and that is appropriate for both beginning and intermediate traders.

Weissman contends that “the single most important tool in developing positive expectancy trading models is the cyclical nature of volatility.” (p. 73) Trendless, low-volatility environments resolve themselves into trending markets; trending, high-volatility markets cycle to low volatility. He discusses the leading volatility indicators, with Bollinger bands being his favorite, average true range following, and ADX rounding out the list. He offers coding for long and short entries and exits using these indicators.

Another tool he finds valuable is timeframe divergence, where the shortest timeframe diverges from longer ones. He discusses this tool at some length and provides ample chart illustrations.

The book proceeds at an easy gait despite the fact that Weissman recognizes that there are no simple, one-dimensional paths to successful trading. “All market behavior is multifaceted, uncertain, and ever changing.” (p. 191)The master trader, he writes, must be disciplined yet flexible, must reprogram himself to avoid the irrational cycles of euphoria and fear (taking partial profits helps in this endeavor) and instead be even-minded, and must learn to participate rather than anticipate. And, of course, must always practice good risk management.

Well, that doesn’t sound too hard, does it? It shouldn’t take all that much work to follow Weissman’s directives. Then comes the chapter on analyzing performance—in particular, the due diligence questionnaire that he advises each reader to complete. The questionnaire with explanations is a staggering 19 pages long and forces the trader to assess virtually every aspect of his business. Anyone who takes this questionnaire seriously should begin to understand how much work really is involved in setting up and running a successful trading operation. Weissman also offers tips on monitoring performance.

Trade Like a Casino won’t guarantee the reader a profitable trading career, but it provides a pretty complete outline of what it takes to win like the house.

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