Friday, December 5, 2014

Reading The Tape, Jesse Livermore and Nassim Taleb

I am a momentum trader and I watch the tape like a hawk. To me the most important skill a trader can have is to be able to read the tape as there in lies the collective greed and fear of the masses. Knowing the tape intimately also helps to identify tricks such as a small cap or penny stock pump and dump. This is especially important in today's "Man Vs Machine" computer algorithum driven markets.

In my opinion, profitable trading is not so much that you the trader get the price of a stock right, but rather it is the ability to anticipate correctly what the masses will do and be ahead of the crowd, whether that is to buy into or to sell out of a position.

I trade stocks and sell covered calls and puts. Some days I am just scalping a stock if I can see which way the momentum is. Other days I swing trade and hold on to a position for a few days or weeks if an opportunity presents itself. Otherwise I am just as happy to be in cash until the risk rewards is good enough for me to risk my chips. I don't have fancy software nor can I afford Bloomberg terminals. In the picture below, you can see my set up - A six year old 14 inch Acer laptop tethered to a 18.5 inch monitor, and a 12 inch Lenovo Thinkpad (which is also my "mobile" trading station when I am on the road). I use TOS (Ameritrade's ThinkOrSwim) platform and also Fidelity Active Trader although less on the latter. It is a very basic setup, nothing fancy, but it works and I trade profitably for a living from 5am to 2 or 3pm PST. I love being on the west coast, as I am done by 1 or 2pm most days and have the whole day ahead of me still to do everything else.


One of my favorite trading books is "Reminiscences of a Stock Operator" by Edwin Lefèvre - a book about a legendary stock operator by the name of Jesse Livermore. You can read more about the book and Jesse Livermore Here on Wikipedia. It is a book I read and re-read many times. The tales in the book as related by the writer taught me more about the psychology of trading than any other trading books I have read. The greed and fear of the masses is what makes an irrational market stay irrational for a long time, much like what we have today - a market that is far removed from fundamentals and the real economy on Main Street.

If you are serious about making a living trading the market. You have to get yourself a copy of the Jesse Livermore book and read it from cover to cover. You won't be disappointed.

The other book I highly recommend is "Antifragile: Things That Gain from Disorder" - by Nassim Nicolas Taleb. It is an easy (or rather easier) read than many of Taleb's books. If you are adventurous and up to the challenge, I would suggest also picking up a copy of "The Black Swan -The Impact of the Highly Improbable" another book by the same author. Both books are about "fat tails" and unexpected event risks. The first book has a more personal tone with the author's real life stories, the latter on the other hand has lots of technical charts and analysis.

These books are indispensable to me. It is funny that I enjoy reading them more than books of any other genre (except for photography), but that is me I guess.

Trade with caution. Have a profitable trading week.

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