Thoughts about the markets, automated trading algorithms, artificial intelligence, and lots of other stuff

  • A Trend-Following Book Worth Reading

    People often ask me which trading books I'd recommend. I've read a lot of books about trading; and though some of them are good, only a handful stand out.

    090808 Trend Following Book Cover Michael Covel wrote a couple of the trading books I consider worth
    reading. The first is called "Trend Following", and the second is
    called "The Complete TurtleTrader".

    Many books are little more than marketing for their author or an
    attempt to sell a "magic bullet" to less experienced traders. In contrast, both of Covel's books are simple enough that a novice would gain valuable information
    from them; yet there's enough content and nuance that experienced traders also will
    benefit from the books.

    I've always loved Jack Schwager's "Market Wizard" book series. Covel's books are different than these because they deal with a narrower subject … more deeply.  Yet they are similar in terms of the value-added content they provide and how accessible they are; and that's high praise from me.

    Covel has an engaging writing style. He keeps things interesting by telling stories rather than simply providing a mechanical "how-to" textbook.  You get enough narrative and detail about accomplished traders to give you a sense of their personality, thought process, and some of the key ideas and distinctions that help make them successful. In addition, he backs-up his research with lots of data, charts, and links to additional information.  This makes it easy for you to continue on your own.

    What is In the Trend Following Book?

    The "Trend Following" book:

    1. explains the basics of trend following;
    2. introduces you to the some of the great trend following traders;
    3. explains the positives and negatives of the technique from a
      performance standpoint;
    4. shows how trend followers did during big
      events, crashes, and panics;
    5. and the later part of book focuses on the
      human-nature side of trading, decision-making and building trading
      systems.

    I like how Covel segments his books logically, and in bite-size chunks.  That means I can pick it up and read something without feeling compelled to start at the beginning and read all of it at once.

    For example, I just opened Trend Following (to page 253) and saw "Five Questions for a Trading System". In this section he lays-out things to consider when evaluating a system.  Examples include how the system determines which market (and how much exposure) to trade, as well as what constitutes entry and exit triggers? Then, in addition to explaining the basics, there are examples and quotes from other traders about the topic.  And he extends the discussion to include emotional issues like how much money you intend to make, the level of time and effort you intend to invest, and the strengths and weakness you bring into the equation.  Bottom-line, he goes out of his way to give you a thorough
    understanding … while getting his points across in an
    easy-to-understand, informative, and interesting ways.

    I found myself referring to both of these books several times in the past several months. If you're looking for something to read (or for some new ideas about trading and money management) I recommend you check out these books.

    090808 Covel's Movie Intro Other Links:

  • A Trend-Following Book Worth Reading

    People often ask me which trading books I'd recommend. I've read a lot of books about trading; and though some of them are good, only a handful stand out.

    090808 Trend Following Book Cover Michael Covel wrote a couple of the trading books I consider worth
    reading. The first is called "Trend Following", and the second is
    called "The Complete TurtleTrader".

    Many books are little more than marketing for their author or an
    attempt to sell a "magic bullet" to less experienced traders. In contrast, both of Covel's books are simple enough that a novice would gain valuable information
    from them; yet there's enough content and nuance that experienced traders also will
    benefit from the books.

    I've always loved Jack Schwager's "Market Wizard" book series. Covel's books are different than these because they deal with a narrower subject … more deeply.  Yet they are similar in terms of the value-added content they provide and how accessible they are; and that's high praise from me.

    Covel has an engaging writing style. He keeps things interesting by telling stories rather than simply providing a mechanical "how-to" textbook.  You get enough narrative and detail about accomplished traders to give you a sense of their personality, thought process, and some of the key ideas and distinctions that help make them successful. In addition, he backs-up his research with lots of data, charts, and links to additional information.  This makes it easy for you to continue on your own.

    What is In the Trend Following Book?

    The "Trend Following" book:

    1. explains the basics of trend following;
    2. introduces you to the some of the great trend following traders;
    3. explains the positives and negatives of the technique from a
      performance standpoint;
    4. shows how trend followers did during big
      events, crashes, and panics;
    5. and the later part of book focuses on the
      human-nature side of trading, decision-making and building trading
      systems.

    I like how Covel segments his books logically, and in bite-size chunks.  That means I can pick it up and read something without feeling compelled to start at the beginning and read all of it at once.

    For example, I just opened Trend Following (to page 253) and saw "Five Questions for a Trading System". In this section he lays-out things to consider when evaluating a system.  Examples include how the system determines which market (and how much exposure) to trade, as well as what constitutes entry and exit triggers? Then, in addition to explaining the basics, there are examples and quotes from other traders about the topic.  And he extends the discussion to include emotional issues like how much money you intend to make, the level of time and effort you intend to invest, and the strengths and weakness you bring into the equation.  Bottom-line, he goes out of his way to give you a thorough
    understanding … while getting his points across in an
    easy-to-understand, informative, and interesting ways.

    I found myself referring to both of these books several times in the past several months. If you're looking for something to read (or for some new ideas about trading and money management) I recommend you check out these books.

    090808 Covel's Movie Intro Other Links:

  • PC Prices – An Offer I Couldn’t Refuse

    Does it make sense to try and fix a broken PC?  I used to think so; now I’m not so sure.

    I’m often early adopter of technology. That’s kind of code for “I’ve had to reformat my computer many times over many years”. And when it came to hardware, let’s just say that the local CompUSA people smiled when I walked in the door. I love technology; and it seems that I never met a faster video card, bigger hard drive, or clever invention that I didn’t want to buy.

    Your Rules of Thumb May Be 090802 PC Retailers Out-Dated.  Mine Were.

    Over the years, I developed a strategy for acquiring new computers.
    I typically bought the absolute top-of-the-line, as soon as the second
    version of it came out. Oh, I bought many when the first version came
    out; but that’s how I developed a strategy to buy one-step back from
    the newest and best.

    A lot has changed in the PC industry.  For example, our local CompUSA and Circuit City stores are now closed, and today I got a pretty good idea why that happened.

    My laptop finally gave out; and all of my software utilities, Internet searches and efforts had failed to bring it back to life. My wife made me promise to go get a new machine before I drove myself (or her) crazy.

    What Kind of Deals are Available Today?

    So this morning I walked into my local Best Buy determined to find a worthy replacement. I was quite surprised to find that I walked out the door with a brand-new laptop, much more powerful than the one that had broken, for less than $500.

    I also found a desktop machine with Intel’s newest chip, 9-gigs of memory and a terabyte hard disk for about $1,000.

    That means hardware is becoming disposable. There comes a point where it’s literally not worth trying to fix something, or re-load an operating system and your programs to make something work reasonably well, when you can upgrade to a newer more stable platform for so little money.

    What Does This Mean For You?

    The point is technology is now cheap enough that you should look at your business and think about the point of diminishing returns. Which machines are calling-out to you that they are past their prime, and it’s time to replace them with something new?

    The PC manufacturers are trying to get rid of their Vista machines … because the new Windows 7 operating system officially comes out this fall. I recommend you take this opportunity to investigate what is out there … and bring some of it home.

  • PC Prices – An Offer I Couldn’t Refuse

    Does it make sense to try and fix a broken PC?  I used to think so; now I’m not so sure.

    I’m often early adopter of technology. That’s kind of code for “I’ve had to reformat my computer many times over many years”. And when it came to hardware, let’s just say that the local CompUSA people smiled when I walked in the door. I love technology; and it seems that I never met a faster video card, bigger hard drive, or clever invention that I didn’t want to buy.

    Your Rules of Thumb May Be 090802 PC Retailers Out-Dated.  Mine Were.

    Over the years, I developed a strategy for acquiring new computers.
    I typically bought the absolute top-of-the-line, as soon as the second
    version of it came out. Oh, I bought many when the first version came
    out; but that’s how I developed a strategy to buy one-step back from
    the newest and best.

    A lot has changed in the PC industry.  For example, our local CompUSA and Circuit City stores are now closed, and today I got a pretty good idea why that happened.

    My laptop finally gave out; and all of my software utilities, Internet searches and efforts had failed to bring it back to life. My wife made me promise to go get a new machine before I drove myself (or her) crazy.

    What Kind of Deals are Available Today?

    So this morning I walked into my local Best Buy determined to find a worthy replacement. I was quite surprised to find that I walked out the door with a brand-new laptop, much more powerful than the one that had broken, for less than $500.

    I also found a desktop machine with Intel’s newest chip, 9-gigs of memory and a terabyte hard disk for about $1,000.

    That means hardware is becoming disposable. There comes a point where it’s literally not worth trying to fix something, or re-load an operating system and your programs to make something work reasonably well, when you can upgrade to a newer more stable platform for so little money.

    What Does This Mean For You?

    The point is technology is now cheap enough that you should look at your business and think about the point of diminishing returns. Which machines are calling-out to you that they are past their prime, and it’s time to replace them with something new?

    The PC manufacturers are trying to get rid of their Vista machines … because the new Windows 7 operating system officially comes out this fall. I recommend you take this opportunity to investigate what is out there … and bring some of it home.

  • Xobni: Looking at Your Inbox Backwards

    I think Xobni is a great tool.  Here is a video demo showing how it can help you.

    Microsoft Outlook is one of the most important computer programs that I use. I say this because so much of my day is spent interacting with it.

    I'm not the kind of person who watches for each incoming e-mail message, and constantly re-prioritizes my day. Nonetheless, I subscribe to a number of newsletters and alert services, and interact with many people throughout the day (some via e-mail, others by phone). That means Outlook is my hub, and I find myself there many times a day. So finding tools to help organize, search, and make better use of this type of information better is  important to me.

    090802 Xobni Logo One of the tools that I've come to rely on is called Xobni. In case you're not familiar with it, that spells "in-box", only backwards. And the reason is that it gives you a totally different perspective on your in-box and how you access and manage your personal information.

    This tool has gone through several iterations, and I consider it fairly mature. It adds the ability to see all the information about the person who sent you an e-mail including all prior e-mails, their contact information,  a live link to their Linked-In and Facebook information streams; any files exchanged, a list of related contacts, and a bunch of other features. Rather than try to describe all that for you here. Take a look at the video; it does a pretty good job of explaining why this can save you time and make your experience with Outlook easier and more productive.

    090802

    Here is a link to Xobni's Product Page.

    Here is the announcement of Xobni Plus.

  • Xobni: Looking at Your Inbox Backwards

    I think Xobni is a great tool.  Here is a video demo showing how it can help you.

    Microsoft Outlook is one of the most important computer programs that I use. I say this because so much of my day is spent interacting with it.

    I'm not the kind of person who watches for each incoming e-mail message, and constantly re-prioritizes my day. Nonetheless, I subscribe to a number of newsletters and alert services, and interact with many people throughout the day (some via e-mail, others by phone). That means Outlook is my hub, and I find myself there many times a day. So finding tools to help organize, search, and make better use of this type of information better is  important to me.

    090802 Xobni Logo One of the tools that I've come to rely on is called Xobni. In case you're not familiar with it, that spells "in-box", only backwards. And the reason is that it gives you a totally different perspective on your in-box and how you access and manage your personal information.

    This tool has gone through several iterations, and I consider it fairly mature. It adds the ability to see all the information about the person who sent you an e-mail including all prior e-mails, their contact information,  a live link to their Linked-In and Facebook information streams; any files exchanged, a list of related contacts, and a bunch of other features. Rather than try to describe all that for you here. Take a look at the video; it does a pretty good job of explaining why this can save you time and make your experience with Outlook easier and more productive.

    090802

    Here is a link to Xobni's Product Page.

    Here is the announcement of Xobni Plus.

  • Capitalogix Commentary 08/02/09

    090802 Bush FlightSuit - Declaring Victory Declaring Victory Over the Financial Crisis?

    This week's news brought President Obama declaring: "We have stopped the free-fall. The market's up and the financial system is no longer on the verge of collapse. … So there's no doubt that things have gotten better." Obama also defended the bailout of the banks as a necessary measure to hold-off greater financial trouble; explaining that he inherited "the worst economy of our lifetimes." That's all well and good; yet, it reminds me of a different President who declared "mission accomplished" … just a tad too quickly.  Time will tell.  I  just hope we keep making progress.

    The Markets Have Done Well Recently.

    During the last three weeks, the S&P 500 climbed more than 10% higher on better than expected earnings.  So far over 70% of companies have beat earnings estimates.  The Dow Jones Industrial Average Index is strong too.  Here is a chart showing recent performance.

    090802 Dow Trend Strength

    What is Driving the Rally?

    Sentiment is driving the markets higher.  But, does it worry you the earnings picture isn’t actually improving?  How about that the defensive posturing by corporations evidenced by massive cost-cutting is not true organic income statement improvement?  It’s certainly not sustainable, and it’s only questionably good news.  Still, the market has continued to respond bullishly to “better than expected”.  This is similar to celebrating that the economy and consumer spending are shrinking … but less than expected.

    Markets can continue to rally in the face of logical questions about its true strength.  For proof, you can look at the following chart of Shanghai's market, which many skeptics believe is a bubble waiting to pop.

    090802 Shanghai Trend Strength

    So, are we really in a new bull market?  Or is this prolonged rally a massive trap, sucking-people-in, only to collapse back down? In my opinion, it doesn't matter.  Despite what we call it, whatever will be, will be.  What matters is how you trade it.

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Major Dow Theory Buy Signal; But Should You Take It? (Barrons)
    • Triggering an S&P 500 Buy Signal That’s Worked Since 1950’s. (Traders Narrative)
    • Ned Davis' Seven Factors to Determine a Secular vs. Cyclical Bull Market. (Ritholtz)
    • Some Promising Signs for the Economy and the Equity Market. (Dash of Insight)
    • CNBC Viewership Down 28%. Does that say something about the Market? (ZeroHedge)
    • "Cash for Clunkers" May Cost Up to $45,354 Per Vehicle. (Seeking Alpha)
    • High-Frequency Trading: A Good explanation of the Core Issues. (WSJ & NYTimes)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week

  • Capitalogix Commentary 08/02/09

    090802 Bush FlightSuit - Declaring Victory Declaring Victory Over the Financial Crisis?

    This week's news brought President Obama declaring: "We have stopped the free-fall. The market's up and the financial system is no longer on the verge of collapse. … So there's no doubt that things have gotten better." Obama also defended the bailout of the banks as a necessary measure to hold-off greater financial trouble; explaining that he inherited "the worst economy of our lifetimes." That's all well and good; yet, it reminds me of a different President who declared "mission accomplished" … just a tad too quickly.  Time will tell.  I  just hope we keep making progress.

    The Markets Have Done Well Recently.

    During the last three weeks, the S&P 500 climbed more than 10% higher on better than expected earnings.  So far over 70% of companies have beat earnings estimates.  The Dow Jones Industrial Average Index is strong too.  Here is a chart showing recent performance.

    090802 Dow Trend Strength

    What is Driving the Rally?

    Sentiment is driving the markets higher.  But, does it worry you the earnings picture isn’t actually improving?  How about that the defensive posturing by corporations evidenced by massive cost-cutting is not true organic income statement improvement?  It’s certainly not sustainable, and it’s only questionably good news.  Still, the market has continued to respond bullishly to “better than expected”.  This is similar to celebrating that the economy and consumer spending are shrinking … but less than expected.

    Markets can continue to rally in the face of logical questions about its true strength.  For proof, you can look at the following chart of Shanghai's market, which many skeptics believe is a bubble waiting to pop.

    090802 Shanghai Trend Strength

    So, are we really in a new bull market?  Or is this prolonged rally a massive trap, sucking-people-in, only to collapse back down? In my opinion, it doesn't matter.  Despite what we call it, whatever will be, will be.  What matters is how you trade it.

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Major Dow Theory Buy Signal; But Should You Take It? (Barrons)
    • Triggering an S&P 500 Buy Signal That’s Worked Since 1950’s. (Traders Narrative)
    • Ned Davis' Seven Factors to Determine a Secular vs. Cyclical Bull Market. (Ritholtz)
    • Some Promising Signs for the Economy and the Equity Market. (Dash of Insight)
    • CNBC Viewership Down 28%. Does that say something about the Market? (ZeroHedge)
    • "Cash for Clunkers" May Cost Up to $45,354 Per Vehicle. (Seeking Alpha)
    • High-Frequency Trading: A Good explanation of the Core Issues. (WSJ & NYTimes)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week

  • Capitalogix Commentary 07/26/09

    This video from The Economist is a great metaphor for where we are in the market.

    The Economist is one of those magazines that piles-up in my office.  I don't want to throw it out; but I also don't read it as often as I want to, or should.  I tell myself it is because I want to read it thoroughly.  Then, when I finally read them, I think that I should read them when they come in (rather than putting them in the pile). 

    Nonetheless, The Economist always seems to provoke thought, and they throw-in something funny more often than you might expect.  I like that they often talk about the "bigger" ideas … and as a trader, I too often get sucked-in by the Siren's Call of urgency and "news".

    So, this week I thought I'd write about two of the bigger ideas that the markets are provoking me to think about recently. 

    The first is how much stock to put into China's recent economic growth?  The second, perhaps related, is really a question about how much can we trust the recent rally, in light of what happened just beforehand. With regard to the second question, I'm talking about the U.S. Markets too.

    First, Let's Look at China.

    The Chinese market and economy seem to have rebounded quickly.  However, there are some signs that all might not be well behind the Great Wall.  For example, here is a chart that shows a dramatic decrease in electric power usage.  It leads to this question. Although Chinese government officials claim GDP is well, are they lying or making things out of thin air (meaning, without electricity).

    Chinese Electrical Usage May Hint at GDP

    When confronted with this inconsistency, China had a quick response; it stopped releasing that data.

    With tongue-in-cheek, here is a video where China celebrates its status as the world's biggest polluter, as proof of its productivity and prosperity.


    China Celebrates Its Status As World’s Number One Air Polluter

    Getting back to our markets, I continue to be surprised by the length and strength of the rally.  Apparently,  Artificial
    Intelligence is a good substitute for lack of the real thing. So at least
    my trading systems have been comfortably "long"… even though I'm feeling bearish.     

    Could The Recent Rally Simply Be a World-Wide Reflex?

    090727 Sector Rotation Model At its simplest, most people try to create a diverse portfolio by trying to buy different types of assets. For example, banks, utilities, tech, staples, and cyclicals. Other classes of assets include things like real estate, precious metals, currencies, and energy. Common sense says that some things go up, while other things go down; that is called "Sector Rotation".  However, during times of economic and financial market distress, a surprising number of things move in the same direction, resulting in few safe havens. 

    This asset class correlation was prevalent during the past year.  There were days when virtually everything, around the globe, seemed to fall.  I saw unusual correlation in our trading systems, too. When the markets really broke down, the diversity we normally see in our trading signals disappeared. It is tough to be long and wrong when trading models say it is more likely that the next move is back up, but the markets keep falling.  Discipline says follow the model; but common sense says the model was designed for normal (or at least "mostly normal") market conditions … and that was not the type of market we were in at the time.

    Not surprisingly, research shows that high correlations were a result of the steep fall in market prices and investor sentiment. An interesting article about this is "Do Correlations Matter When the World is On Fire".  In addition, Felix Salmon poses a disturbing question: since we're still seeing such a high correlation, even as so many things are going up … is it possible that this is a natural artifact of the recent financial crisis, and perhaps another sign that the market is still in a time of economic and market distress. Likewise, Bloomberg points out that investors are moving in-lockstep like never before, driving up stocks, commodities and emerging markets.

    The point is this high correlation actually creates a risk of replaying last year. In other words, the herd mentality threatens to leave investors with little refuge once again. 

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Buffett’s Goldman Stake Pays Richly. (DealBook)
    • Morgan Stanley Compensation Soars to 72% Of Revenues. (Business Insider)
    • Europe Falls Behind Silicon Valley In VC Deal Flow. (WSJ)
    • Implications of High-Speed Trading Systems On Markets & Investors. (NYTimes)
    • What Went Wrong with Economics? Avoiding the Mistakes of the Past. (Economist)
    • Investors in India Bet on the Weather. (WSJ)
    • Superstition & Finance: A Total Eclipse of the Brain. (Economist)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week

  • Capitalogix Commentary 07/26/09

    This video from The Economist is a great metaphor for where we are in the market.

    The Economist is one of those magazines that piles-up in my office.  I don't want to throw it out; but I also don't read it as often as I want to, or should.  I tell myself it is because I want to read it thoroughly.  Then, when I finally read them, I think that I should read them when they come in (rather than putting them in the pile). 

    Nonetheless, The Economist always seems to provoke thought, and they throw-in something funny more often than you might expect.  I like that they often talk about the "bigger" ideas … and as a trader, I too often get sucked-in by the Siren's Call of urgency and "news".

    So, this week I thought I'd write about two of the bigger ideas that the markets are provoking me to think about recently. 

    The first is how much stock to put into China's recent economic growth?  The second, perhaps related, is really a question about how much can we trust the recent rally, in light of what happened just beforehand. With regard to the second question, I'm talking about the U.S. Markets too.

    First, Let's Look at China.

    The Chinese market and economy seem to have rebounded quickly.  However, there are some signs that all might not be well behind the Great Wall.  For example, here is a chart that shows a dramatic decrease in electric power usage.  It leads to this question. Although Chinese government officials claim GDP is well, are they lying or making things out of thin air (meaning, without electricity).

    Chinese Electrical Usage May Hint at GDP

    When confronted with this inconsistency, China had a quick response; it stopped releasing that data.

    With tongue-in-cheek, here is a video where China celebrates its status as the world's biggest polluter, as proof of its productivity and prosperity.


    China Celebrates Its Status As World’s Number One Air Polluter

    Getting back to our markets, I continue to be surprised by the length and strength of the rally.  Apparently,  Artificial
    Intelligence is a good substitute for lack of the real thing. So at least
    my trading systems have been comfortably "long"… even though I'm feeling bearish.     

    Could The Recent Rally Simply Be a World-Wide Reflex?

    090727 Sector Rotation Model At its simplest, most people try to create a diverse portfolio by trying to buy different types of assets. For example, banks, utilities, tech, staples, and cyclicals. Other classes of assets include things like real estate, precious metals, currencies, and energy. Common sense says that some things go up, while other things go down; that is called "Sector Rotation".  However, during times of economic and financial market distress, a surprising number of things move in the same direction, resulting in few safe havens. 

    This asset class correlation was prevalent during the past year.  There were days when virtually everything, around the globe, seemed to fall.  I saw unusual correlation in our trading systems, too. When the markets really broke down, the diversity we normally see in our trading signals disappeared. It is tough to be long and wrong when trading models say it is more likely that the next move is back up, but the markets keep falling.  Discipline says follow the model; but common sense says the model was designed for normal (or at least "mostly normal") market conditions … and that was not the type of market we were in at the time.

    Not surprisingly, research shows that high correlations were a result of the steep fall in market prices and investor sentiment. An interesting article about this is "Do Correlations Matter When the World is On Fire".  In addition, Felix Salmon poses a disturbing question: since we're still seeing such a high correlation, even as so many things are going up … is it possible that this is a natural artifact of the recent financial crisis, and perhaps another sign that the market is still in a time of economic and market distress. Likewise, Bloomberg points out that investors are moving in-lockstep like never before, driving up stocks, commodities and emerging markets.

    The point is this high correlation actually creates a risk of replaying last year. In other words, the herd mentality threatens to leave investors with little refuge once again. 

    Business Posts Moving the Markets that I Found Interesting This Week:

    • Buffett’s Goldman Stake Pays Richly. (DealBook)
    • Morgan Stanley Compensation Soars to 72% Of Revenues. (Business Insider)
    • Europe Falls Behind Silicon Valley In VC Deal Flow. (WSJ)
    • Implications of High-Speed Trading Systems On Markets & Investors. (NYTimes)
    • What Went Wrong with Economics? Avoiding the Mistakes of the Past. (Economist)
    • Investors in India Bet on the Weather. (WSJ)
    • Superstition & Finance: A Total Eclipse of the Brain. (Economist)
    • More Posts Moving the Markets.

    Lighter Ideas and Fun Links that I Found Interesting This Week