Trader Vic: The Best Trading Book You've Never Heard Of

A few months back a friend mentioned an obscure trading book to me, citing it as one of the best trading books he's ever read, despite the fact that very few people have ever heard of it. Since this guy is a top notch trader in his own right, I made a mental note to add this book to my reading list.

This weekend I read Trader Vic: Methods of a Wall Street Master cover to cover, and have to agree it's a fantastic read - one that I think our regular readers will definitely enjoy. It's authored by legendary trader Victor Sperandeo, who tells all for 260 pages. Think of the insight contained in each interview in Market Wizards: Interviews with Top Traders, but in even more detail.

Sperandeo categorizes market participants into three basic types:

1. Traders, who focus their activity on the intraday and/or short term trend
2. Speculators, who focus on the intermediate trend, taking market positions and holding them for weeks to months
3. Investors, who deal mainly with the long term trend, and hold their positions from months to years

He identifies himself as primarily a speculator, but one who plays all three trends, which he jokes might make him a "speculative trader who also invests."

What I found so great about this book is that Vic does not hold up any one theory or technique as holding the secret to investment success. On the contrary, he cites this as the flaw of most investment books - so, he set out to write one that would combine technical and fundamental analysis, with a healthy sprinkling of probabilities and risk management.

The key takeaway is that investing/trading is a game of probabilities. Your goal, as a market participant, is to maximize your probability of success on each trade, while simultaneously optimizing your risk/reward on that trade.

For much of the book, Sperandeo shares, chapter by chapter, the considerations he uses when placing his positions. He holds Dow Theory in very high regards, using it as a strong guide (but never an absolute indicator). He also uses basic technical analysis, saying its greatest value is that it "provides a method of measuring the tendency of the market to react in a particular way under similar conditions throughout history."

He does not rely on complex technical analysis though, and instead pokes fun at the die hard practitioners. Fellow fans of Elliott Wave Analysis may be a little disappointed that Vic does not regard it as particularly useful.

However Vic has no shortage of additional insights to share that compliment his use of basic technical analysis. He discusses how he identifies a change of trend, which he believes is "the fastest and most risk-free way to make money in the markets." He shows you how to draw and trendline and make use of moving averages and oscillators - again for framing your trading decisions, and not as an absolute guarantee of success.

As most astute traders seem to be, Sperandeo has deep rooted libertarian views. He is not a fan of Keynesian Economics (to put it lightly), and properly lambastes this school of thought for the fraud that it is...ending by basically saying that this is all going to end very badly.

Last but certainly not least, the second portion of the book is dedicated to helping you get your mental and emotional house in order. Vic says that out of 38 people he trained in the 1980s, only 5 made money and went on to pursue their own careers as traders?

Why such a low success rate? He cites the difference between success and failure in trading as "neither intelligence or knowledge to trade, but the will to execute knowledge."

In other words, the unsuccessful traders were not so because they lacked knowledge - it was because they couldn't keep their heads about them and stay disciplined in the heat of the moment!

This discussion of personal discipline and beliefs is very valuable, and similar in flavor as what Van Tharp advises and schools traders on.

In summary, whether you are primarily a trader, specular, or investor, Trader Vic: Methods of a Wall Street Master is a fun and enlightening read. I'd highly recommend you add it to your reading list.

What Does Trader Vic See Ahead for 2010?

The one thought that kept floating through my head while reading Trader Vic was: "Man, I'd love to hear what this guy is thinking today!"

Well, as luck would have it, our friends over at Hard Assets Investor just caught up with Trader Vic last week!

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Which commodities do you think are going to do well next year?

Victor Sperandeo, "Trader Vic" (Sperandeo): Well, I'm on record across the world as saying that gold is the best investment in the world for the next two to three years. It's fundamentally obvious, but when you're printing huge amounts of paper vs. something that is considered money, the paper will depreciate and the hard assets will go up. So gold and silver will do well—silver a little less so—but gold certainly.

Even when it was about $830-$850/oz, I basically said, "I don't see any scenario where it can come down." But I wouldn't say that it can't correct at any given moment. When the Fed decides to raise interest rates, at that point, gold will sell off. It will be a steep correction.

But it's also a buying opportunity, because if they raise rates, it would only be to try to stabilize the dollar. But it wouldn't affect the kinds of huge deficits and the printing of money that's going on for the next 10 years. It's unsustainable. So gold, that's my most favorite, if you will.

Read the rest of HAI's interview with Trader Vic here.

The Latest At-Home Party Craze: Gold Selling

So is the gold market getting overheated, or not? The opinions on both sides sure are polarized.

Some, like our pal Trader Vic, insist this isn't a gold bubble. I was listening to the Financial Sense Newshour yesterday, and they agreed, saying we're not even close to the mania stage yet.

On the other hand, our local rag, the Sacramento Bee, reports that "the latest at-home party craze is gold selling."

Move over, Tupperware, candles and kitchenware.

The latest at-home party craze is gold selling.

Whether spurred by cash-strapped consumers or the alluring jump in gold prices, the concept is enticingly simple: Bring your tangled chains, broken bracelets, outdated earrings or a hoop that's lost its mate. Even dental fillings or an ex-boyfriend's heart-shaped pendant. Your stash of unwanted gold is tested, weighed and traded on the spot. For cash.

And with gold briefly sweeping past the $1,200-an-ounce mark in recent weeks, it's becoming an even more tantalizing invitation. Here and across the country, it seems, old gold is turning into green.

If not a bubble, then we're at least overdue for the current correction, which we're about $100 into so far. And surprise, surprise - look at the gold bull that predicted this correction a few weeks back...our hero, Jim Rogers...

Correction: We're Not Trading Against Jim Rogers After All

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Positions Update - Still Really Short the S&P, Had to Roll the Dollar Contract

On Friday I had to roll my dollar contract, and then realized I didn't have enough margin to buy back in...oops! So I'm still holding the S&P shorts and puts, and am waiting for a re-entry point on the long dollar side.

We had a nice week of gains on the dollar, and we may be due for a short-term pullback, so I'll wait patiently, and hope for the S&P breakdown that we've been waiting for.

What's reassuring is that nobody seems to be a believer that this is the start of a dollar rally. That's just the way we like it.

A strong week for the dollar - looks like the bottom may finally be in place.

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $18,304.68

Cashed out: $20,000.00
Total value: $38,304.68
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

How to Get Started Trading the Markets - The Right Way

How do you master the maddeningly difficult exercise of trading? As we mentioned this morning, paper (imaginary) trading just doesn't cut it. You don't have the stomach churning fear of losing money when the market goes against you.

No, the only way to do it is to get out there and do it yourself. I read a good piece of advice yesterday actually - start with a stake so small, you won't mind losing it...because you probably will the first time!

Then you can examine what went wrong, and improve your methods next time.

Trading is fascinating because it's a constant learning process. If it were easy, there would be a lot of millionaires running around who made their fortune in the market, and that's simply not the case.

It is possible to become "good" though, I truly believe that (and I say that not as someone who is good, just someone who tries to learn and improve everyday). To help you on your quest to master the markets, I hope this guess piece by expert trader Jeffrey Kennedy is a helpful one, as he tackles three basic tenets of trading...

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The Three Phases of a Trader's Education: Psychology, Money Management, Method
July 27, 2009

By Jeffrey Kennedy

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 10, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.

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Aspiring traders typically go through three phases in this order:

Methodology. The first phase is that all-too-familiar quest for the Holy Grail – a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.

Money Management. So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.

Psychology. The third phase is realizing how important psychology is – not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can’t find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.

I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence – fear of losing money and greed for more money.

Once the aspiring trader understands this psychology, it’s easier to understand why it’s important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.

Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.

When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I’m more than comfortable utilizing the same guidelines that many professional money managers use – 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one’s trade decision is incorrect, but it also insures longevity. It’s one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.

When aspiring traders grasp the importance of psychology and money management, they should then move to phase three – determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn’t the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. It’s free until August 10.

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Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting service.

Five Trading Mistakes That Can Break You

Here's an excellent guest piece covering the fatal flaws that most traders make by Jeffrey Kennedy of Elliott Wave International. It is wayyyyy easier to lose money trading than it is to make money...as I can personally tell you from my past 15 months of being brought back down to Earth.

However trading CAN be quite profitable - and fulfilling - if done right. And to trade the right way, you must follow the fundamental rules of trading...and avoid the common pitfalls that cause almost 90% of traders to lose money. Now here's Jeff, an excellent trader in his own right, sharing the five fatal flaws of trading...

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Five Fatal Flaws of Trading
June 25, 2009

By Jeffrey Kennedy

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, one of Elliott Wave International's senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life. Maybe you'll find one in Jeffrey's take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.

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For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

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Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."

Fatal Flaw No. 5 – Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI's premier commodity forecasting package.