Thursday, September 04, 2014

My 'A-ha!' moment

When I first started getting interested in the financial markets, I plunged straight in at the deep end by day trading. I joined a US-based chat room and immersed myself in their methodology, and even had some initial success, but then reality kicked in. Risk control was poor, I was overtrading (with lots of equity being swallowed up by commissions) and I tended not to react quick enough to the opportunities that did present themselves. 

After a few months I was losing money, so I decided to pull the plug on my day trading activities. Following this, I spent several months struggling to determine how I was going to trade, using a method and timeframe I was comfortable with, and how could I make money out of all of this (there's more on this here in my interview with Steve Burns).

Sorting the timeframe issue out was easy - I was not cut out for day trading, so going to a daily or or a longer timeframe would suit my personality as well as work/family commitments.

My 'A-ha!' moment for me came one Christmas, for I received two books as presents:

The Intelligent Investor, by Benjamin Graham;
Trend Following, by Michael Covel.

Here were two books with different outlooks on how people should go about trading or investing. One based on fundamentals, the other on price action.

I'd heard of Graham, and also his protégé, Warren Buffett. At that time, names like Ed Seykota, Richard Donchian, Richard Dennis and the other traders mentioned in Trend Following were completely unknown to me.

With a background in accountancy, you may have expected me to be drawn more towards Graham's book.

Had I initially picked up and read The Intelligent Investor, I guess its possible that my future investing or trading activities may have ended up in a completely different direction. 

As it was, I started off by reading Covel's book, and quickly found myself agreeing with the straightfoward arguments and rationale contained within, and the simple logic behind the basic concepts. 

I particularly liked the fact that risk management was an integral part of the overall approach - for the most part, risk could be quantified and controlled, if you have necessary rules in place, and the discipline to follow them. This was a weak part of my day trading activities. By the time I had finished reading Covel's book, I was completely sold on trend following as a viable strategy - it had given me a road map to follow.

That started me on the journey to where I am now. To this day, Trend Following remains in my trading library, and gets re-read every few months, along with other great books like Market Wizards, How to Trade in Stocks, etc. As for The Intelligent Investor, I never read so much as a page.

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