This month* marks the release of my third book, with the snappy title “Leveraged Trading“, and the slightly less snappy subtitle “A professional approach to trading FX, stocks on margin, CFDs, spread bets and futures for all traders“.
|Photo courtesy of Harriman House. As you can see, the book makes an excellent books-stand for itself|
* Official publication date is 29th October. Actually I finished the book in late August, and I’ve had print copies in my hand since mid September (and I know some other people have received their copies already), but for some reason I have never understood my books are always released at the end of October in odd numbered years (Systematic Trading 2015, Smart Portfolios 2017, Leveraged Trading 2019). Whether I stick to this schedule for book four is an open question.
You can order the book from the publishers, Harriman House, here (other, massive monopolistic online bookshops are available, but I get a better royalty if you buy direct from the publishers). There is plenty of information on my website, here.
This post is aimed at regular readers of my stuff who might be wondering if it’s worth buying this third book (short answer: yes, of course! Even shorter and more honest answer: maybe!).
Where did the idea for this book come from?
What is the main focus of the book and who is it for?
But it’s also a book for those who don’t necessarily want to trade purely systematically. In my first book I introduced the idea of a “Semi-Automatic Trader”- someone who chooses which position to hold in some non systematic way, but sizes and closes positions systematically. I take this idea much further here, and explain in more detail how you can combine human intuition with the most useful parts of a trading system. Importantly, I also explain how you should calibrate your risk and trading frequency depending how well you have performed in live trading.
It’s a book for relative beginners. As such it doesn’t assume much knowledge and also goes into significant amounts of detail about specific leveraged products. I chose five products, because one is common in the US (margin trading), two are common in Europe but illegal for retail traders in the US (spread-bets and CFDs), and two are traded pretty much everywhere (futures and spot FX).
It’s a book for traders without much money. A key theme throughout is answering the question “What is the best use of my scarce capital?”.
What specific advice is there for smaller traders?
* If you must know: within product type and across instruments it’s vol scaling. But also the more ‘institutional’ the product, the larger the capital required, the cheaper it is to trade. So futures are cheaper than CFDs for example.
So the optimum choice for a smaller trader is to find a relatively cheap product which they can afford to trade. That rules out most futures (too big) and also a lot of OTC products (too expensive).
If I assume that traders don’t have much capital, and are relatively inexperienced, then it makes sense for their first trading system to be binary (no ‘forecasts’, which requires more capital to do properly), discrete (trades are opened and closed without any adjustment to position size), and close trades using a stop loss (which most people understand).
Then suppose you have slightly more than the bare minimum to trade: what next? Should you diversify by adding another instrument to your portfolio? Should you make your system more complex by adding new trading rules? Should you start trading a non binary system? All of these decisions are discussed, and viewed through the prism of a trader with limited capital.
Why the title, and the focus on leveraged trading?
Secondly getting your leverage level right is probably one of the most important decisions any trader can make, and one most retail traders get spectacularly wrong. As an institutional trader your risk target is exogenous and usually fairly modest (even the 25% vol target I run at would be considered punchy in most shops). At a product level you’re unlikely to have excessive leverage, unless it’s something with really low vol (front contract EuroYen anyone?) or negative skew. But telling a retail trader that they should only use leverage of 1.5 rather than the 50 their broker will allow them is another story.
Thirdly, and very cynically, I didn’t want to make this a “system trading” book as this would limit the audience. Of course I want more people to read this from a philanthropic point of view, and the money is a nice bonus (note book is also priced 50% lower than my first two books). I think fewer people are likely to pick up a book with “Systems” in the title than something that name-checks the CFDs and spread-bets that they’ve been hearing about in the news.
Finally from a technical point of view it’s much easier to explain position sizing using inverse vol weighting if you can use leverage. You don’t need to worry about risk appetite and the book can be 50-100 pages shorter.
I’ve already read “Systematic Trading”. Should I bother with this?
“You will see from my website that I wrote another trading book a few years ago: “Systematic Trading” (ST). Perhaps you are browsing on-line or in your local book shop and trying to decide which of these two books you should buy. Maybe you already own ST, and are considering adding this book, “Leveraged Trading” (LT), to your collection.
To help you decide, the main differences between the two books are:
- As the title suggests, ST is mostly aimed at traders who are enthusiastic about systems trading. LT helps new traders learn how to trade by using a system, but then explains how to combine the system with their own human intuition; the method I’ve named “Semi-Automatic Trading”.
- The trading systems in ST require large amounts of money (at least £100,000; around $130,000). The Starter System in LT needs just £1,100 or $1,500. I spend a lot of time in LT discussing how smaller traders can make best of their scarce capital.
- ST is written for relatively advanced traders with some prior knowledge of certain financial concepts. LT is suitable for novices.
- ST is a generic book which doesn’t go into much detail about individual markets. LT explains how to trade specific leveraged products.
- ST explains the various components of a complex trading system one by one; it isn’t until the book is finished that you can see the entire picture. In LT I introduce a simple system in its entirety which you can start using right away. I then go on to explain how, and why, you could make it more complicated.
- ST explains how to design trading systems from scratch, which requires using software to simulate historical system performance (a process called back-testing). In LT I present a system I have already back-tested. I then explain how you can modify the system for different types of trading, and to cover different markets, without needing any further testing.
Because I have designed the trading systems in this book with the same principles in mind there are some ideas that readers of ST will find familiar, although there is no duplicated content in this book. I would recommend that you read “Leveraged Trading” (LT) if:
- You tried to read ST and didn’t get it.
- You read and understood ST but are struggling to build a simple system from scratch.
- You have not read ST and are an inexperienced trader who is unfamiliar with financial theory and back-testing software.
- You are specifically interested in trading leveraged products: FX, CFD, margin accounts, spread-bets, and futures.
- You do not have enough cash to trade the systems in ST.
- You are interested in combining your own trading intuition with a trading system: semi-automatic trading.”
I am the guy who complained there weren’t enough formulas in “Systematic Trading”
In all seriousness because this book is more ‘hand-holding’ it does go into more explicit detail and includes formulas. So for example where in Systematic Trading I might have just said “Take a weighted average” here I include the actual formula for a weighted average.
But don’t panic, there are no greek letters* in the book, just simple formula that an 11 year old could understand.
* Full disclosure: there might be a few capital Sigma to indicate a summation. But definitely no integrals.
I am the guy who complained there weren’t enough numerical examples in “Systematic Trading”
I notice there is the usual obsession with costs
You really have it in for brokers and trading gurus, don’t you?
Of course I don’t hate all brokers – only the ones that are expensive or dodgy. And not everyone who has ever written a book about trading is automatically dodgy, or that would clearly include me. But you should be extremely skeptical of any trading gurus who claim outlandish returns, who don’t tell you what their trading returns are, who aren’t open about their methodology, and whose videos mostly consist of them prancing around a villa in Thailand whilst occasionally pretending to trade.
|You can rent this villa for your youtube videos here|
Presumably as this is a ‘beginners’ book there is nothing in here about statistical uncertainty?
Who helped you write this book?
(Anyone who compares my unedited blog and my edited books can clearly see the value of a decent editor)
As with previous books I had three “beta readers” who had to read the shockingly awful earlier drafts before Stephen had turned them into a readable book. Riccardo Ronco also read “Smart Portfolios” and did an equally excellent job with this book. James Udall filled in my not inconsiderable gaps in understanding about CFDs and spread bets. Finally Tomasz Mlynowski, whose day job involves (amongst other things) reading my lecture notes and explaining them to baffled students, brought along his fine toothed eye for errors and mixed metaphors.
Finally, it’s a cliche, but writing is a job with flexible hours from which it’s difficult to switch off. So it’s tough living with a writer. So the three young people, one slightly older person, and cat, that live with me deserve a lot of credit.
Okay, maybe not the cat, which has a nasty habit of sitting on my lap when I am trying to finish a paragraph.