Friday, February 3, 2012

Williams, Long-Term Secrets to Short-Term Trading

Larry Williams is a legendary commodity trader, author, and educator, probably best known for his blow-out performance (a 11,000% return in 12 months) in the 1987 Robbins World Cup trading contest. In this long overdue second edition of Long-Term Secrets to Short-Term Trading (Wiley, 2012; the first edition appeared in 1999) Williams incorporates some of his more recent reflections on trading.

First, what this book is not: it is not a day-trading manual. In fact, contrary to the title of the book, Williams writes that “You will never make big money until you learn to hold on to your winners, and the longer you hold, the more potential you have for making a profit. … Thus short-term traders, by their very definition, are limiting their opportunities.” (pp. 60-61)

Second, what this new edition doesn’t and does do: it doesn’t update any of the backtests of Williams’ trading “secrets” from the first edition. Fair enough, because as Williams readily admits, systems “work for a while, work really well and then fall apart.” (p. 86) In the second edition he offers some new ideas coupled with “a little common sense and testing.” (p. 95) Nonetheless, traders who are looking for the latest and greatest money-making systems will be disappointed in this book. The systems have (think the music industry) a vinyl quality—regarded by aficionados, largely cast aside by the mainstream and the cutting edge. For better or worse, most quants are pursuing a different path and Williams’ systems seem a bit dated. Then again, as he writes, “you’ll catch more fish with worms and hoppers on a bent pin than any fly ever tied.” (p. 245)

To my mind, the real strength of this book lies in Williams’ thoughts on what it takes to be a successful trader (which is very different from being a trading contest winner—think money management). He writes about fear and greed (and why “there is a lot more to fear than fear itself”). He illustrates how stop placement is critical to a system’s results. And he explains why even successful traders who have no additional income stream may not be able to pay their bills month in and month out.

Long-Term Secrets to Short-Term Trading should be required reading for every new, and even not so new, trader. It imparts the wisdom of the battle tested.

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