Thursday, September 04, 2014

My 'A-ha!' moment

When I first started getting interested in the financial markets back in 2003, I plunged straight in at the deep end by day trading US stocks. I joined a chat room and immersed myself in their methodology, and even had some initial success, but then reality kicked in. 

Risk control was up and down, and there was no clearly defined exit strategy. In addition, lots of my equity was being swallowed up by commissions, and I tended not to react quick enough to the opportunities that did present themselves. 

One thing that did made sense to me, however, was the basic entry technique - 'breakouts' from a price consolidation were used, which meant going long on moves to the upside and going short on moves to the downside.

After a few months, and primarily thanks to the transaction costs at the time, 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.

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 better as well as my work and family commitments.

My 'A-ha!' moment for me came at Christmas 2004, for I received two books as presents:

The Intelligent Investor, by Benjamin Graham; and
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 though, names like Ed Seykota, Richard Donchian, Richard Dennis and the Turtles, and the other traders mentioned in Trend Following were completely unknown to me.

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 or framework to follow.

Of course, the fact that price breakouts were used and that trend followers would trade long and short married up very well with what I was trying to do when day trading. I then found the basic Turtles rules, and started adopting the basic elements to trading stocks.

That started me on the journey to where I am now. To this day, Trend Following (I have two different editions) remains essential reading, 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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