Archive for April, 2009
Share Trading – Tenth Anniversary Edition
Share Trading comes from the prolific author and educator, Daryl Guppy. First published in 1996, this tenth anniversary edition was revised in 2001.
The book is divided into three parts. First, Daryl takes the reader through a solid grounding in the basics for survival. The reader learns the advantages of being a private trader and Daryl provides a much needed reality check for anyone considering active trading. This book will not fool the reader into thinking trading is a guaranteed road to riches. Trading tools (charting packages, newsletters, data vendors), benchmark returns and trading targets for various groups of shares are explained in detail before any trading techniques are even mentioned. Daryl ensures the trading landscape is clearly explained before discussing actual trading.
In part two, Daryl discusses the importance of defining the trend and how to go about it. The importance of knowing how to use trend lines and channels for identifying support and resistance levels is explained. The reader also learns of their importance in locating entry and exit points.
Part three is devoted to money management. Daryl discusses the two per cent fixed fractional approach and how it works when combined with various levels of pyramiding.
Although 10 years old, Share Trading has stood the test of time because, although shares and market participants have changed over the years, the markets and people’s reaction to them – hope, fear and greed – have not. You will not find any grandiose promises of trading riches in Share Trading, but sensible and solid ideas on how to approach the business of trading. Share Trading is a book I would recommend to new traders for a sensible insight into active trading; and to old timers to remind them to keep it simple, keep it real and keep it conservative.
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
The Little Book that Beats the Market
This is a book for all value investors. Joel Greenblatt is an experienced manager whose fund has averaged 40 per cent per year over 20 years. The book manages to distil successful value investing down to a single formula designed to beat the market.
Joel comes from the Benjamin Graham school of investing and takes the ease of value investing one step further. The reader learns that the existence of a single formula to select good companies at bargain prices isn’t new, as Ben Graham bought companies close to their net asset value.
Like Ben Graham, Joel believes the market, over the short term, will price shares based on emotion, while over the longer term it will price shares based on value. So the objective is to take advantage of the market’s short-term ‘emotional’ pricing to buy good companies at bargain prices. Joel defines good companies as those that provide a high return on capital. He defines bargain prices as selling at a high yield. The trick is to find companies that are the best in both categories.
Scanning 3500 companies, Joel’s ‘magic formula’ has (when choosing the best 30 companies) averaged 30.8 per cent per year over a 17-year period compared to the S&P500‘s average annual return over the same period of 12.4 per cent per year.
I thoroughly enjoyed the book, which is written in an easy style. Joel takes the reader on an enjoyable journey containing plenty of amusement, research and explanations as to why his magic formula approach to value investing works and will continue to work. I have no hesitation in recommending this book to value investors and suggesting they purchase extra copies for their children and grandchildren. It will make a gift for life.
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
Warrior Trading
Warrior Trading attempts to take the reader inside the mind of an élite trader. The book begins with why the majority of economic theories and fundamental analysis are flawed and how the Warrior Trader can take advantage of such flaws. Clifford encourages people to think independently and find real-world economists who treat their field of observation as more art than science, accepting the limitations of their theoretical models.
Clifford believes a correct combination of fundamental analysis with technical analysis will help a trader succeed. He believes all major trends are fundamental price shifts evolving within a broad band of price action, the details and following sub-movements of which can only be understood and traded profitably using technical analysis.
For technical analysis, Clifford prefers to keep it simple. He believes markets trend within Elliott’s five-wave structure. However, Clifford does not believe the market should adhere to the strict rules of the theory since Elliott Wave, like economics, is not a perfect science. The author encourages the reader to keep technical analysis simple and look to complement the analysis with continuation patterns and support and resistance levels, particularly failed levels that flip-flop into new resistance and support levels.
Looking at how investment banks create and distribute their consensus market views, Clifford builds a good case for why it pays to be a contrarian. Using previous market calls on the AUD and the Euro, Clifford demonstrates that although it can be hard at times to go initially against the majority’s view, it is rewarding to do so in the longer term.
The book finishes with a section that aims to help readers decide what type of trader they are. Clifford continues his warfare analogy, describing swing traders as “Swordsmen” and trend traders as “Archers”. He then discusses the eight battle steps a “Swordsman” or “Archer” can follow to take them to total victory.
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.
The Bell Does Ring
The Bell Does Ring supports the belief that it is possible to pick market tops and bottoms. To support its claim, The Bell Does Ring describes a collection of methods that people could consider using to stay ahead of the crowd.
The book begins with a look at the power of crowd psychology, by exploring previous booms and busts. Pauline provides a good summary of previous financial mishaps with a look at Tulip Mania, the Mississippi Scheme, the South Sea Bubble and the more recent Poseidon and Asian financial crises. By learning how to watch out for and identify signs of fear and greed the alert trader is able to identify tops and bottoms and stay ahead of the crowd.
Following the look at crowd psychology, Pauline provides a review of reversal patterns that can be used to identify turning points. From head and shoulders and diamonds to double and triple tops and bottoms, the book provides clear and concise examples of how reversal patterns have developed in the past and so can be identified in the future. A look at traditional continuation trend patterns such as pennants, wedges and triangles follows. There is a brief discussion on technical indicators.
Pauline then entertains the reader with the core part of her book – an explanation of Elliott Wave. Part III, which discusses Elliott Wave, occupies 10 of the 18 chapters. In her discussion of Elliott Wave, Pauline provides a good summary of the role Fibonacci plays. With clear and concise charts, the reader is given a good introduction to Elliott Wave and how the identification of a 5th wave can signal market tops and bottoms.
The Bell Does Ring finishes with a discussion on WD Gann and how the use of his ideas can help to time reversal points. Looking at squaring the triangle and circle and Gann’s square of nine, readers are given an insight into timing trades.
In summary, The Bell Does Ring provides an introduction to reversal patterns, Elliott Wave and an element of Gann’s work. The book is well written and easy to follow with plenty of chart examples to support the narration. My only note of caution is that, although appealing, looking to identify tops and bottoms is usually fraught with danger and littered with more tears than smiles.
This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.