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Finance and Investing Quotations

January 7th, 2009

Buy From Amazon:
Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel
Published in 2005

Michael Covel’s Trend Following book was atrocious.  Probably the worst investing / trading book I’ve ever read.  The one place he excelled was in the collection of finance quotations (he included them presumably to make up for lack of original material and to boost his page count).  Luckily one can’t copyright quotations, so I’ve included the best below.

Famous Finance, Business, Trading, and Investing Quotations

No good decision was ever made in a swivel chair.
General George S. Patton, Jr.

A prudent investor’s best safeguard against risk is not retreat, but diversification. True diversification is difficult to achieve by spreading an investment among different stocks, or different equity managers, or even by mixing stocks and bonds, because the two are not complementary.
David Harding

Men wanted for hazardous Journey. Small wages. Bitter cold. Long months of complete darkness. Constant danger. Safe return doubtful. Honor and recognition in case of success.
The Time, London, 1913
Recruitment ad for Shackleton’s Antarctic Expedition

When it is a question of money, everyone is the same religion.
Voltaire

Education rears disciples, imitators, and routinists, not pioneers of new ideas and creative geniuses. The schools are not nurseries of progress and improvement, but conservatories of tradition and unvarying modes of thought.
Ludvig von Mises

The important thing in science is not so much to obtain new facts as to discover new ways of thinking about them.
Sir William Bragg

Fish see the bait, but not the hook; men see the profit, but not the peril.
Chinese Proverb

If you think education is expensive, try ignorance.
Derek Bok

The perfect speculator must know when to get in; more important he must know when to stay out; and most important he must know when to get out once he’s in.
Unknown

It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.
Charles Darwin

The trend is your friend except at the end when it bends.
Ed Seykota

The four most expensive words in the English language are “this time its different.”
Sir John Templeton

Price makes news, not the other way around. A market is going to go where a market is going to go.
Peter Borish

Be less curious about people and more curious about ideas.
Marie Curie

I began to realize that the big money must necessarily be in the big swing.
Jesse Livermore

Most of us don’t have the discipline to stay focused on a single goal for five, ten, or twenty years, giving up everything to bring it off, but that’s what’s necessary to become an Olympic champion, a world class surgeon, or a Kirov ballerina. Even then, of course, it may be all in vain. You may make a single mistake that wipes out all the work. It may ruin the sweet, lovable self you were at seventeen. That old adage is true: You can do anything in life, you just can’t do everything. That’s what Bacon meant when he said a wife and children were hostages to fortune. If you put them first, you probably won’t run the three-and-a-half-minute-mile, make your first $10 million, write the great American novel, or go around the world on a motorcycle. Such goals take complete dedication.”
Jim Rogers

Whenever you can, count.
Sir Francis Galton

The beginning is the most important part of the work.
Plato

Life is a school of probability.
Walter Bagehot

Everything flows.
Heraclitus

I always know what’s happening on the court. I see a situation occur, and I respond.
Larry Bird

The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will.
Vince Lombardi

Measure what is measurable and make measurable what is not so.
Galileo Galilei

I think the only cardinal evil on earth is that of placing your prime concern within other men. I’ve always demanded a certain quality in the people I liked. I’ve always recognized it at once – and its the only quality I respect in men. I chose my friends by that. Now I know what it is. A self-sufficient ego. Nothing else matters.
Ayn Rand

Losing an illusion makes you wiser than finding a truth.
Ludwig Borne

A trader’s job description is stunningly simple: don’t lose money.
Richard Donchian

Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes.
Jesse Livermore

The criterion of truth is that it works even if nobody is prepared to acknowledge it.
Ludwig von Mises

Success demands singleness of purpose.
Vince Lombardi

When the mind is in a state of uncertainty the smallest impulse directs it to either side.
Publius Terentius After

Lenny (Dykstra) was so perfectly designed, emotionally, to play the game of baseball. He was able to instantly forget any failure and draw strength from every success. He had no concept of failure. I was the opposite.
Billy Beane, Moneyball

Life is too dynamic to remain static.
John W. Henry

History does not repeat itself, people just keep forgetting.
Jason Russell

Knowing others is wisdom. Knowing self is enlightenment. Mastering other requires force. Mastering self requires strength.
Lao Tsu

If there is one trait that virtually all effective leaders have, it is motiviation. They are driven to achieve beyond expectations – their own and everyone else’s. The key word here is achieve. Plenty of people are motivated by external factors such as such as a big salary or the status that comes from having an impressive title or being part of a prestigious company. By contrast, those with leadership potential are motivated by a deeply embedded desire to achieve for the sake of achievement.
Daniel Goleman

Fat, drunk, and stupid is no way to go through life, son.
Animal House

Reason is the main resource of man in his struggle for survival.
Ludwig Von Mises

What feels good is often the wrong thing to do.
William Eckhardt

Human being never think for themselves, they find it too uncomfortable. For the most part, members of our species simply repeat waht they are told – and become upset if they are exposed to any different view. The characteristic human trait is not awareness but conformity… Other animals fight for territory or food; but, uniquely in the animal kingdom, human beings fight for their ‘beliefs’… The reason is that beliefs guide behavior, which has evolutionary importance among human beings. But at a time when our behavior may well lead us to extinction, I see no reason to assume we have any awareness at all.  We are stubborn, self-destructive conformists. Any other view of our species is just a self congratulatory delusion.
Michael Crichton

Having an education is one thing, being educated is another.
Lee Kuan Yew
Former Prime Minister of Singapore

Never call your intuition. It calls you.
Jason Russell

To be uncertain is to be uncomfortable, but to be certain is to be ridiculous.
Chinese Proverb

From error to error, one discovers the entire truth.
Sigmund Freud

I have no special talents, I am only passionately curious.
Albert Einstein

We want to buy stocks to hold forever.
Warren Buffett

If you want a guarantee, buy a toaster.
Clint Eastwood

We are what we repeatedly do. Excellence, then, is not an act, but a habit.
Aristotle

No human investigation can be called real science if it cannot be demonstrated mathematically.
Leonardo da Vinci

Never let fear of striking out get in your way.
Babe Ruth

If you don’t risk anything, then your risk even more.
Erica Jong

Life shrinks or expands in proportion to one’s courage.
Anais Nin

Most battles are won before they are ever fought.
General George S. Patton

Luck is a dividend of sweat. The more you sweat, the luckier you get.
Ray Kroc
Founder of McDonalds

The search for truth is more precious than its possession.
Albert Einstein

When the facts change, I change my mind.  What do you do sir?
John Maynard Keynes

I looked at myself as an athlete or a boxer in training who had to sacrifice many other things for the sake of success.
George Soros

Managing a hedge fund requires single-minded devotion.
George Soros

A man’s reach should exceed his grasp.
Robert Browning

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Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael Covel

January 6th, 2009
Trend Following Michael Covel

Trend Following Michael Covel

Buy From Amazon:
Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel
Published in 2005

Key Takeaways

I’ve read a lot of investing books.  And this may well be the worst.  All fluff and no substance.  Reminded me of a bad high school English paper that spams the reader with superfluous words and narrow margins to meet a page count requirement.  After 150 pages, I seriously considered abandoning the book and moving on. But its in my DNA to finish any book I start, so I tortured myself skimming the last 250 pages of uselessness.

Trend Following is an excellent trading strategy and deserves to be studied.  But Covel, in Trend Following, is not the way to learn.  Covel goes in circles gushing about how great Trend Following is and about how great the Hedge Fund managers are that employ Trend Following.  But he sounds much more like a starstruck high school girl with a teenage crush than a trading guru.  He never gets around to giving us the beef.

Definitely don’t buy this book, you can get what you’re looking for in this post where I profile the techniques he covers, or you can read my post on ‘The Slow Turtle Trade‘ from James Altucher‘s book How to Trade Like a Hedge Fund.  When I find a good Trend Following book, I will update this post.

The one thing Covel did well was collect some excellent quotes on Finance, Trading and Investing.  He included at least two quotes per page (presumably to make up for lack of original material and to boost his page count).  For this, I was grateful and have provided the best in my post on Finance Quotations.

Page 266 – Trend Following Systems

(Yes, it took Michael Covel until 266 pages into his 400 page book to write anything worth remembering.)

Fast Simple Moving Average (SMA) Crossover of the Slow Simple Moving Average

  • Buy the index when the Fast SMA (50 day) crosses over the slow SMA (100 day)
  • Sell and then go short when the fast SMA (50 day) crosses under the slow SMA (100 day)
  • Set a stop loss of four times the Average True Range (ATR) of 10 days

Note: The stop loss risk control avoids a loss of more than 2% of equity

Note: The True Range is the absolute value of the greatest of the following:

  • The distance from today’s high to today’s close
  • The distance from yesterday’s close to today’s high
  • The distance from yesterday’s close to today’s low

The Average True Range calculates the Simple Moving Average to the True Range.

Results:
Backtesting this trade from November 2001 to March 2002 results in a an average annualized return of 19.6% with a maximum drawdown of 46%.  But less than 40% of the system’s trades are profitable.  Using sensitivity analysis for the number of days to use in the Fast and Slow SMA, combinations in the 40 – 60 fast SMA days and 100 – 120 slow SMA days provide the best results.

Fast Simple Moving Average (SMA) Crossover of the Slow Simple Moving Average with Pattern Entry

This system combines trend following and countertrend concepts.  It is called Trend with Pattern Entry (TPE) and was first introduced by Dion Kurczek and Volker Knapp in Active Trader Magazine in April 2003.  The premise is that prices above the SMA indicate a bull trend, but should only be bought on countertrend pullbacks.  Similarly, prices below the SMA indicate a bear trend, but should only be sold short into countertrend rallies. The prices wait for three consecutive countertrend (down or up) days before entering the market.

  • Buy the index if the price is above the 100 day SMA and the closing price decreased over the last three days.
  • Exit the position (sell) if the price reaches the trailing stop, which is 4 times the ATR of 10 days subtracted from the current closing price.
  • Then short the index if the price is below the 100 day SMA and the closing price increased during the last three days.
  • Exit the position (buy to cover) if the price reaches the trailing stop, which is 4 times the ATR of 10 days added to the current closing price.

Results:
Backtesting this trade from October 2000 when the market experiences a strong up-move three times in a row while still below the SMA.  The system starts short and finally ends in early 2002.  The system generates 21.8% annualized returns, but experiences several drawdowns of over 20% and one of 49%. Indeed, large drawdowns are the biggest challenge for Trend Following systems.  The large drawdowns are why investors are instructed to Trend Follow a basket of uncorrelated assets and commodities.  If an investor were to get hit by highly correlated large drawdown across all investment classes, it could wipe them out.

There are several variations to these techniques such as Pyramiding, or adding to a position shortly after the trend is validated and proved profitable.

Remember, the best part of the book are the quotes Covel collected, so be sure to visit my post on Financial Quotations.

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Getting Started in Currency Trading, by Michael Archer and Jim Bickford

December 30th, 2008
Getting Started in Currency Trading Michael Archer Jim Bickford

Getting Started in Currency Trading Michael Archer Jim Bickford

Buy from Amazon

Getting Started in Currency Trading: Winning in Today’s Hottest Marketplace
by Michael D. Archer and Jim L. Bickford
Published in 2005

Key Takeaways
In this post I summarize what I believe are the key takeaways of the book. If you like what you see, I encourage you to buy the book.  The book is an excellent introduction to currency trading.  Even if you don’t trade currencies, its a worthwhile read for any investor – especially if you are an active trader.  The book includes trading insights, regardless of what you trade or invest in.  The book is a quick read and the chapters are short and straightforward.

Note: the pages referenced in this post are from the 1st Edition published in 2005.  However, there is a newer edition published in 2008, that you would likely want to buy instead.

Page 28 – What Every Trader Must Know – Forex Terms
Every Forex trade involves the simultaneous buying of one currency and the selling of another currency.  These two currencies are always referred to as the currency pair in a trade.  The seven most frequently traded currencies are called the major currencies (USD, EUR, JPY, GBP, CHF, CAD, and AUD). The most frequently traded minors are the New Zealand dollar (NZD) the South African rand (ZAR), and the Singapore dollar (SGD).

The base currency is the first currency in any currency pair.  It shows how much the base currency is worth as measured against the second currency.  For example, if the USD/CHF rate equals 1.6215, the one USD is worth CHF 1.6215. The quote currency is the second currency in any currency pair.  This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.  A pip is the smallest unit of price for any currency.  Most currency pairs consist of five significant digits and most pairs have the decimal point after the first digit, e.g. EUR/USD equals 1.2812.  In this case, a single pip increase would be a pip increase to EUR/USD 1.2813.  A single pip decrease would be a pip decrease to EUR/USD 1.2811.

So, for example, when a the EUR/USD quote is increasing from 1.300 to 1.400, the EUR is strengthening – it previously could only buy 1.300 USD and now it can buy 1.400 USD.  The reverse is also true.  When the quote is decreasing, the first currency in the pair, the base currency, is weakening. So, for example, while the EUR could previously buy 1.300 USD, now it can only buy 1.200 USD.  In this case, it has weakened.

(be sure to scroll through additional pages below)

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Trade Like a Hedge Fund, by James Altucher

November 28th, 2008
Trade Like a Hedge Fund James Altucher

Trade Like a Hedge Fund James Altucher

Buy From Amazon:
Trade Like a Hedge Fund: 20 Successful Uncorrelated Strategies & Techniques to Winning Profits
by James Altucher
Published in 2004

Key Takeaways
In this post I summarize what I believe are the key takeaways of the book. If you like what you see, I encourage you to buy the book.  The book is a technicians guide with several different systems for buying low, selling high.  Mr. Altucher primarily employs counter trend strategies.  The book illustrates how a professional hedge fund manager thinks about the markets to take advantage of irrational ‘breakouts’ and ‘breakdowns’.  There is a lot of data, but the book is not overly technical in any respect.  The book has some great ideas to take with you when you trade, but I wouldn’t follow them blindly.  For example, I felt his stance on risk management was a little weak, often suggesting you should hold on to losing positions longer than I think wise.

Page 15 – Swing Trading the Gap

  1. Buy a stock when the stock is down the day before, AND your chosen reference index (e.g. S&P500 or Nasdaq) is gapping down more than 0.5 percent, AND the stock is gapping down more than 5 percent
  2. Hold the stock at least until the next morning
  3. Sell the stock when the stock goes lower than the prior day’s close.  Not to be confusing, note, this means you could hold the stock for several days, as long as it keeps opening higher each successive day.
  4. Cut any loss at 3 percent

Example:
Stock CIEN closed at 51.51 on April 16, 2001  The next day, April 17, 2001, it gapped down to 48.11 when we bought it.  It then reversed that same day and closed at 53.09.  The stock then gapped up on April 18, 2001 and kept gapping up at the open for two ore days before finally stalling on April 20, 2001.  Since it opened that day lower than the close the day before at 67.30, the trade was stopped out at the open at 67.09 for a 38.22 percent profit.

CIEN 4-17-011

CIEN 4-17-011

Basically, this is saying buy a stock when the stock AND the market are oversold.  At the very least, down the day before, then gapping down sharply the next day.  Then sell it when the stock starts to stall.  Obviously this strategy doesn’t work every time.  But his book shows that executing this trade 500 times on NASDAQ stocks (using a bit of leverage) during 2001 yielded 373 percent annual return.

(be sure to scroll through the additional pages below)

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