Recommended Reading

I thought I'd set up a list of books that I have read and can recommend. I'll keep this page updated and have a link from a perma-link to it.


Way of the Turtle


A book I keep referring to. This book gives a great insight into the world of trading by one of a select group of millionaire traders. Although it is focussed on the financial markets, e.g. options trading, futures trading, etc, there is so much that can be applied to bet trading.
The sections on Behavioural finance and the work of Kahnman and Tversky are worth reading. The book covers the methods the turtle group used to make millions. The methods are simple and seem mainly concerned with building mechanical trading systems that remove the emotional side. Having just lost pretty heavilly (in terms of proportion of bank) due to these very issues (not being mechanical enough), I can only relate to it more.

The New Market Wizards

This was the book that lead me to the "Way of the Turtle". In this book, author Jack Schwager, interviews some of America's top traders. Not just those who have brought in the most money, but those who have performed consistently over the years (see next book, to discover why just basing on most money is not a valid reason).
A really interesting book and one that hammers home the same points about getting away from emotional trading and escaping from the herd mentality.

Fooled by Randomness

This was a real eye opener to me. The premise of this book is that we (including many mathematicians, statisticians, business people, me, you, pretty much most people), just don't really understand randomness and make wrong assumptions, that can have real bad repercussions. The author talks a lot about traders (as this is also his background) who after making a lot of money "blew up" and lost all they had made and lots more due to what the deemed were unprobable events. Written in a very conversational tone and with personality. An eye opener and a must read for anyone involved in an area that involves randomness.

Too much emotion!

"Price movement is a function of the collective perception of buyers and sellers in a market", according to Curtis Faith, in "Way of the Turtle". This definition says to me that the most important aspect of trading is an understanding of the psychology of buyers and sellers. He goes on to say, "Markets are comprised of individuals all with hopes, fears and foibles." and suggests that the trader's edge comes in "seeking opportunities that arise from these human emotions".

The subject of Behavioural Finance is a study of this. The subject is too big to cover in a post but I hope, in this one, to go over some of the factors that affect betting and laying decisions.

People tend to drive their decisions by emotions rather than rational reason. To back this up, an experiment was documented, whereby a man was found, who having had a stroke that damaged the areas of his brain that generated emotion, (so that all his decisions would be rational, reasoned and conscious), was found to be unable to make even a basic decision, constantly too-ing and fro-ing between alternatives. It turns out that emotions are the short cut that help us make quick decisions (and then justify, after the fact, with our rational mind (remember, hindsight has 20:20 vision!)).

Part of the reason people lose money when trading is due to these emotional short cuts, e.g.

• People are prone to making systematic errors in circumstances of uncertainty
  
• Under duress, people make poor assessment of risk and event probability


• People rarely make completely rational decisions
  

Some examples of the emotions we encounter when making trading decisions:

• Hope - "I hope it goes up after I buy"


• Fear - "I can't take another loss, I'll sit this one out"


• Greed - "I'm making loads, I'll double my position"


• Despair - "The market keeps moving against me, whatever I do!"

Underneath these emotions are what are called cognitive biases. These are beliefs and attitudes that also lead us to make bad trading decisions. I'll talk about these in a future post.

Just like "Trading Places"

I keep referring back to "The Way of the Turtle: The Secret Methods That Turned Ordinary People into Legendary Traders" book, but it has really got me excited.

I think I need to explain why it is called, "The way of the turtle". Anyone who remembers the movie, "Trading Places", with Eddie Murphy and Dan Ackroyd will remember that the story started when two businessmen made a wager about whether business success was an inborn talent or could be taught. The turtle story is similar.

Two trading gurus, Richard Dennis and William Eckhardt, were arguing about whether trading was a natural talent or whether it could be taught. To find out they (guess what?, that's right!) had a wager. They would put out adverts looking for a group of 23 people that they would interview and choose from to be their trainee traders. They would then give them 2 weeks training and then let them trade using their money. The group were known as the turtles and they were very successful, in fact legendary.

In the book "The New Market Wizards: Conversations with America's Top Traders", there is a chapter called, "The Silence of the Turtles". One of the turtles is interviewed but he says very little. All the turtles were under secrecy and non-disclosure contracts and so had to keep quiet.
With the contract period over, Curtis Faith, one of the most successful and youngest (19 at the time) turtles, now explains their methods and philosophy.

It is really worth a read, just for the parts about Behavioural Finance.

The differences between financial markets trading and bet trading are not so great, other than the amounts of money on the table and so reading this book really is a benefit.

Market states

An interesting part of the "Way of the turtle" book was about market states. One of the guiding turtle principles was to not try to predict which direction the market would move but instead to determine what market state it was in.

The 4 market states are:

1. Stable and quiet


2. Stable and volatile


3. Trending and quiet


4. Trending and volatile

Obviously, for trend based trading, state 3 is ideal. The market state changes over time, so it needs to be regularly checked.

The level of volatility could be used to decide where to set a stop loss, e.g. if the market state is 4, then having a one tick stop loss would drop you out the trade early.

Back from Honeymoon

Just a quick post. Just got back from our honeymoon. Its been about 24 hours in the same clothes, so pretty jaded and going to hit the hay but just thought I'd pop a quick note up.
Whilst we've been away in Thailand, I've had plenty of time to lounge around and read. Read "Way of the Turtle", which is an excellent book full of great trading info. I'll post up some of the lessons learnt there very soon. Also read another great book about randomness and our perception of it. This one was also written by a trader and it is called, "Fooled by Randomness: the hidden role of chance in life and in the markets", by Nassim Nicholas Taleb. Another good one which I'll be using to make some posts with.
Anyway, I need my bed, so bye for now.

The way of the turtle

No trading this weekend, appart from a quick go with £2 stakes (came out 10p up, wow!). My wedding is in less than a week, on 23rd June. We've still got a fair bit to sort out, so not sure if I'll get much chance to post or trade this week. Please feel free to drop me a comment about yourself or any trading thoughts you have.
One thing though, I'm about two thirds of the way through the Trading Wizards book and I remember reading about a group of traders that went under the name of the Turtle group. Basically, two top traders had a bit of a wager about whether trading success is a natural ability or can be taught. They put an advert in the paper and interviewed a number of people, selecting ones that they thought would fit in best with their trading style and system. This group were then taught and mentored and given a chunk of cash to trade with. The group as a whole got amazing returns. All of them signed confidentiality agreements and never spoke about the system, until now. I just found a book called "The Way of the Turtle", written by one of the original group, spilling the beans on what they were taught. I've only skimmed it so far but it looks good. I'll post up a review when I've read it and any pointers I find as I go along.