The Finance Book Club

Kangaroo Tails
Recognize these? One of the few original concepts in ‘Naked Trading’ isn’t so original and they didn’t even give Dr. Elder any credit! Although if I recall correctly my test of Kangaroo Tails didn’t turn out too well. Maybe he has a better take on it?

1. A kangaroo tail consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices. Upward-pointing kangaroo tails flash sell signals at market tops, while downward-pointing kangaroo tails occur at market bottoms

1. They leap at you from the charts and are easy to recognize. (true, but they are also surpassingly rare, at least when I checked)
2. Oh go on, let’s have another check. Especially since that’s the end of the chapter. Then we’ll move on to ‘Computerized Technical Analysis’
   1. EURUSD - using the loosest definition (ignoring the ‘tight weave’ requirement for example) I found 12 bars that might be kangaroo tails in 1000 bars of history. About 10 were successful) Good win rate! But hard to make a career on such a rare signal
   2. Maybe stocks work better? I checked AAPL and found 3 instances in 1000 bars. All probably would have given you at least one day’s worth of profit. Notice that Elder doesn’t tell us how long to hold the kangaroo tail trades.
   3. TSLA? I found 6 instances in 1000 bars, of which only about 2 would have given you more than a day’s profitable opportunity.

So either this pattern is too well known now or it’s a typical TA effort.

Next: 'Computerized' Technical Analysis!!!

Computerized Technical Analysis

1. Beginning traders should steer clear of day-trading. It demands instant decision making, and if you stop to think, you're dead. Learn to trade in a slower environment. Become a competent position or swing trader before you consider day-trading. If you compare swing trading and day-trading, it is like playing the same video game at level one or level nine. You run the same mazes and dodge the same monsters, but the pace of the game is so fast at level nine that your reactions must be automatic. (a bit of hyperbole, I think)
2. Indicators
   1. Trend-following (MACD-lines, OBV, A/D)
   2. Oscillators (MACD-histogram, stochastic, rate of change, RSI)
   3. Miscellaneous (new high-new low index, put-call ratio, CoT)

3. Elder says the two early experts on moving averages were Richard Donchian and J.M. Hurst!
4. Elder likes to use not one but two exponential moving averages. The longer EMA shows a longer-term consensus of value. The shorter-term EMA shows a shorter-term consensus of value. (but what do they really tell you?)
   1. The ‘value’ lives between the two lines

5. A well-drawn channel should contain approximately 95% of all prices that occurred during the past 100 bars. (2 standard deviations then)
6. It's impossible to trade successfully with just a single indicator or even a pair of moving averages. Markets are too complex to extract money from them with a single tool. (dog’s bollocks)
7. The rest of the chapter is about MACD divergences and I just don’t care.

The Directional System

1. As soon as I saw the rules I knew it must be a Wilder invention
2. I could be wrong, as Elder’s description is somewhat convoluted but I think this is simply the ‘Directional Movement System’ that I described and tested here https://www.forexfactory.com/thread/...1#post13933591
3. Kerry Lovvorn likes to plot three sets of lines around a moving average: at one, two, and three ATRs above and below an EMA to help visualize current volatility.
4. Looks like :
   Attached Image (click to enlarge)

   

The next chapter is about Volume, but since forex doesn’t use it (not in any real sense) and I don’t usually trade individual stocks, and I think volume has become a less predictive signal; I’m less interested.

The ‘Force Index’ which is Elder’s own invention is interesting, but after toying with it, I find it to be much like any other indicator - just an abstraction of price. If you’re curious it’s on Tradingview.

The rest of the book deals with trading time frames, and leaves me with the same feeling I had at the end of ‘Mass Psychology’ a lot of talking, but not much specific useful info.

The ‘General Market Indicators’ are probably more useful so I’ll look at those next.

General Market Indicators
The New High New Low Index

1. Simply subtract the new lows from the new highs
2. You can find this indicator in just about everything
3. Elder provides an example of a NH-NL line under SP500
   Attached Image (click to enlarge)

   
4. Just looking at it I get the feeling it does not provide you with any useful info; although he is suggesting when the line reaches a certain base value it anticipates a rise. This would work great until it doesn’t, like COVID panic time and the current stock climate.
5. Also - see the divergences, Elder tells us. After every divergence, price went back up. Must mean something.

The 50 day MA

1. when a stock trades above its MA, the current consensus of value is above average—bullish. When a stock trades below its MA, the current consensus of value is below average—bearish.
2. When the “stocks above their 50-day MA” indicator reaches an extreme—above 75% or below 25% and then moves away from that level, it shows that the intermediate-term trend has reached a likely turning point. (no it doesn’t, because then it would actually be useful)

Other indicators

1. Advance / Decline line
2. A rally is more likely to persist when the A/D line rises to a new high, while a decline is likely to deepen if A/D falls to a new low in step with the Dow.
3. But you could say the same thing if price is going up or down and you can’t tell me that divergences are anything more than coincidental

Look how closely the line tracks the actual price. Just follow the price.

 

1. Old stock market books are full of fascinating indicators, but you have to be very careful using them today. Changes in the market over the years have killed many indicators. (truth!)
2. No one uses TRIN or TICK anymore (indicators that were in the first edition of the book)
3. Indicators based on the volume of low-priced stocks lost their usefulness when the average volume of the U.S. stock market soared and the Dow rose tenfold. The Member Short Sale Ratio and the Specialist Short Sale Ratio stopped working after options became popular. Member and specialist short sales are now tied up in the intermarket arbitrage. Odd-lot statistics lost value when conservative odd-lotters bought mutual funds. The Odd-lot Short Sale Ratio stopped working when gamblers discovered puts.
4. And every other indicator in this book stopped working in 1987.

Signals from the Press

1. Letter writers just follow the trend
2. Financial editors are even more cowardly than their writers
3. It takes a powerful and lasting trend to lure journalists and editors down from their fences. (and when that happens, usually you should do the reverse- as per Donnelly)
4. When journalists start expressing strongly bullish or bearish views, the trend is ripe for a reversal.
5. A group of three or more ads touting the same “opportunity” in a major newspaper or magazine warns of an imminent top. Because the time it takes to write and produce ads means the trend is old)
6. Internet / email pump and dumps

CoT and SEC insider selling

1. Hedgers—the commercial producers and consumers of commodities—are the most successful market participants. (based on what? They rarely even care about the market direction)
2. Officers of publicly traded companies know when to buy or sell their shares.
3. When you start getting close to the position limits set by the CFTC you get classified as a ‘big speculator’
4. For Elder the big speculators aren't as accurate as the hedgers in terms of future market direction
5. Elder does a decent job explaining the CoT but as I’ve mentioned (https://www.forexfactory.com/thread/post/13702647#post13702647) they’ve changed the terminology for every group so I suspect this is somewhat outdated info.

Short interest and days to cover

1. Whenever you look for a stock to buy, check its Short Percent of Float and Days to Cover. The usual, normal readings don't provide any great information, but the deviations from the norm often deliver useful insights

Ok, I skipped over quite a bit but we’re still not even halfway done.
Next : Trading Systems

Trading Systems

1. In the end, only one kind of backtesting prepares you to trade—manual testing. (truth!) It is slow, time-consuming, and cannot be automated, but it's the only method that comes close to modeling real decision making. It consists of going through historical data one day at a time, scrupulously writing down your trading signals for the day ahead, and then clicking one bar forward and recording new signals and trades for the next day.
2. One-bar-at-a-time testing is vastly superior to what you can get from backtesting software because it tests your decision-making skills
3. If one-bar-at-a-time testing shows positive results, start trading small positions with real money. These days, with brokerage commissions as low as $1 for buying or selling 100 shares, you can test your indicators and systems while risking tiny amounts.
4. Elder discounts paper trading as not being realistic. No money on the line, no test of your psychology.
5. it's essential to write down all relevant numbers before you enter a trade. You're more objective before you put any money at risk; once in a trade, you'll be tempted to give it “more room to run.” (recall Donnelly)
6. At the time of this writing, Elder has three strategies that he trades.
   1. My favorite is a false breakout with a divergence.
   2. My second choice is a pullback to value during a powerful trend.
   3. Last, I occasionally “fade an extreme”—bet on a reversal of an overstretched trend.
   4. Each of these strategies has its rules, but the key point is this—I'll only take a trade that fits one of them. No chasing of random cars for this old dog!

Three Key Demands for Every Trade

1. Trade setup—write down the three key numbers for every trade:
   1. your entry,
   2. target,
   3. and stop.
   4. Before entering the market you need to decide how much you'll pay, how much you'll risk, and how much you expect to gain.
   5. The ratio of potential reward to risk should normally be better than two to one. The only time to deviate from this rule is when technical signals are especially strong. Of course, don't fudge your target to turn a borderline trade into an acceptable one. Your target needs to be realistic.

2. Risk management—decide in advance how many dollars you're prepared to risk on this trade. Divide that amount by your risk per share—the distance from your entry to your stop. This will give you the number of shares you may trade.
3. Last but not least, every single trade must be based on a specific system or strategy. “It looks good to me” isn't a system! If you want to trade for a living, you need to define your trade plans, strategies, or systems—call them what you like—and enter only those trades that fit their criteria.

Next: Triple Screen Trading System

Triple Screen Trading System

1. Triple Screen applies three tests or screens to every trade. Many trades that seem attractive at first are rejected by one or another screen. The trades that pass the Triple Screen test are much more likely to succeed.
2. More than just a system - a method, a style!
3. Long-term charts - trend-following indicators
4. Intermediate-term charts - counter-trend oscillators
5. Trend-following indicators are profitable when markets are moving but lead to whipsaws in trading ranges. Oscillators are profitable in trading ranges, but give premature and dangerous signals when the markets begin to trend.
   1. This system solves this, says Elder

6. A trader can always find a group of indicators telling him what he wants to hear.
7. The trend of any trading vehicle can be both up and down at the same time, depending on what charts you use. A daily chart may show an uptrend, while a weekly chart shows a downtrend, and vice versa. We need a system to handle conflicting signals in different timeframes.
8. the Triple Screen trading system is based on the observation that every timeframe relates to the larger and shorter ones by approximately a factor of five. (how he figures that, though, seems to rely on trading unusual timeframes like M25 and M2)
9. Whatever timeframe is your favorite, the Triple Screen calls that the intermediate timeframe. (what if I don’t have a ‘favorite’ or my favorite is MN?)
   1. The long-term timeframe is one order of magnitude longer. The short-term timeframe is one order of magnitude shorter.

10. Once you select your intermediate timeframe, you may not look at it until you examine the longer-term timeframe and make your strategic decision there. (ok, cool, but I kinda wish he would just define the damn time frames instead of introducing this much flexibility/ambiguity. Too much wiggle room.)
11. Carry trading? Use daily for intermediate. Then weekly is one order of mag higher. Hourly charts - one order of mag shorter. (but note that hourly charts are not ⅕ the daily charts as daily charts are to weekly charts)
12. Day trading? Use M5 for intermediate, M25 for long-term, and M2 for short-term.
13. Examine the long-term screen first. The intermediate screen finds dips/counter-trends from which to enter.
14. Confused/confusing? You’re not alone - this section suffers from a lack of structure/systematization.

First Screen - Market Tide

1. Triple Screen begins by analyzing the long-term chart, one order of magnitude greater than the one you plan to trade.
2. make an unbiased decision on a long-term weekly chart before even glancing at the daily.
3. Elder is maddeningly vague about what he uses on the long-term screen. It used to be a MACD-histogram, then he switched to the slope of a weekly EMA. Then he used the Impulse system (which we haven’t even been introduced to yet). So what should we use??
4. Ok, we’re using MACD-histo. The best buy signals occur when MACD-Histogram turns up from below its centerline. The best sell signals are given when its slope turns down from above its centerline.

The best buy signals are A and E. Both are below the centerline (spring)

 

1. However Elder clearly states that you can use any trend-following indicator you want.

“You can use most trend-following indicators, as long as you analyze the trend on the weekly charts first and then look for trades on the daily charts only in that direction.”

1. Screen One Summary: Identify the weekly trend using a trend-following indicator and trade only in its direction.
2. The second screen of Triple Screen identifies the wave that goes against the tide.
3. Screen Two: Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities. I like using Force Index, described in chapter 30, for the second screen, but other oscillators, such as RSI, Elder-ray, or Stochastic also perform well.
4. Screen Three: “I like to switch to 25-minute and 5-minute charts and use day-trading techniques for entering my swing trades.”
   1. I still don’t actually know what to do though. He explains a technique for those who don’t have access to live data (wtf) that involves measuring average pullbacks to an EMA.

5. When the weekly trend is up and a daily oscillator declines, place a buy order below the fast EMA on the daily chart, at a level of an average downside penetration. Alternatively, place a buy order one tick above the high of the previous day. If prices rally, you will be stopped in long automatically when the rally takes out the previous day's high. If prices continue to decline, your buy-stop will not be touched. Lower your buy order the next day to the level one tick above the latest price bar. Keep lowering your buy-stop each day until stopped in or until the weekly indicator reverses and cancels its buy signal.
6. Yeah still no idea how to day trade on screen three at the five minute chart or whatever. Make it up.

 

1. A ‘neat’ combination of timeframes for day-trading stocks is a set of 39- and 8-minute charts. The U.S. stock market is open from 9:30 a.m. to 4 p.m.—six and a half hours or 390 minutes. Using a 39-minute chart as your long-term screen neatly divides each day into 10 bars. Make your strategic decision there, and then drop down to a chart that's 5 times faster—an 8-minute chart—for tactical decisions on entries and exits.
2. Before you enter a trade, write down three numbers: the entry, the target, and the stop. Placing a trade without defining these three numbers is gambling.
3. Triple Screen calls for setting profit targets using long-term charts and stops on the charts of your intermediate timeframe. If you use weekly and daily charts, set profit targets on the weeklies but stops on the dailies.
4. When day-trading and using a 25-minute and a 5-minute pair, set the profit target on a 25-minute chart and the stop on a 5-minute chart. This helps you aim at the greater results, while holding down the risk.
5. The Triple Screen trading system calls for placing fairly tight stops. Since it has you trading in the direction of the market tide, it doesn't give much room to losing trades. Get on with the tide—or get out.

I like the general idea of using a triple filter; I trade using a similar type of idea, but there’s no chance of testing or evaluating this system because it’s so vaguely defined. Dislike.

Next: The Impulse System

The Impulse System
Compared to the cumbersome and complex and vague 3ScreenSystem, the Impulse system is simple, and easy to understand. Aw yeah, simple and easy to understand is tight!
An obscure reference that you might get if you watch a lot of YouTube videos.

1. The basic idea is that any market move in any timeframe can be described by inertia and power (interesting).
2. Inertia can be measured by a rising or falling EMA
3. Power can be described by the MACD-histogram, specifically the slope between the latest bar and the previous bar

Then you colour the bars of the chart depending on the agreement/disagreement of the two indicators.

Elder couldn’t get this system to automatize though, and decided that it’s a ‘censorship’ system. In other words, it doesn’t tell you what to do, but what NOT to do. In other words, when the bars are green, shorting is prohibited, and when they are red, going long is prohibited.

“It keeps me out of trouble. I may develop my trading plans based on any number of ideas, signals, or indicators—and then the Impulse system forces me to wait until it no longer prohibits an entry in the planned direction. In addition, the Impulse system helps me recognize when a trend starts weakening and suggests an exit.”

However later on he counters that by saying you simply enter when the current signal ends. So for example if the bars are green, and they turn not-green, that’s the best time to enter long. If they are red, and they turn non-red, that’s a good time to go short. Arrows show the long entries in a bull trend, and the red sloped arrows show places to exit.


Elder also advises using a triple-screen filter using this system.

1. If you're a short-term momentum trader, you can buy as soon as both timeframes turn green and take profits as soon as one of them fades to blue.
2. When trying to catch market turns, the best trading signals are given not by green or red but by the loss of green or red colors.
3. If you're a short-term momentum trader, close out your trade as soon as the color of the Impulse system stops supporting the direction of your trade, even in one of the two timeframes. Usually, the daily MACD-Histogram turns ahead of the weekly. When it ticks down during an uptrend, it shows that the upside momentum is weakening. When the buy signal disappears, take profits without waiting for a sell signal.
4. The Impulse system encourages you to enter cautiously but exit fast. This is the professional approach to trading. Beginners tend to do the opposite; jump into trades and then take forever to exit, hoping for the market to turn their way.
5. A swing trader may stay in a trade, even if one of the timeframes turns blue. What he should never do is stay in a trade against the color.

Seems clear enough - let’s try it out.
Sadly I won't have time to do this as I'm busy working on a project with Kefada. So if anyone else wants to have a go at this just let me know. I can set you up with some indicators I found online that might help. My only request is that you share your results here.

Channel Trading Systems

1. Market prices tend to flow in channels, like rivers in their valleys.
2. Channels help us anticipate where those support and resistance levels are likely to be encountered.
3. Elder gives J.M. Hurst credit for pioneering trading channels in The Profit Magic of Stock Transaction Timing which is a book that had a big influence on me, though we haven’t covered it. Not all of that influence was good however.
4. Elder also mentions Mandelbrot’s work on cotton prices, and takes away ‘prices oscillate above and below value’ as the key point to remember. The idea is to buy value at the low period of the oscillation and sell it at the high period, covering at value.
5. Elder calls Bollinger bands standard deviation channels, but that’s definitely something else if you’re using mt4 terminology
6. Channels mark the boundaries between normal and abnormal price action. (except there is no such thing as ‘normal’. Maybe ‘common’ and ‘uncommon’?)
7. Elder outlines methods of constructing channels but there are so many different ways that it seems pointless to focus on his particular way. Start by trying out the envelopes indicator built-in to MT4.
8. “Keep adjusting values until a channel contains approximately 95 percent of all price data for the past 100 bars, about five months on a daily chart.”
9. “One of my strict rules is never to buy above the upper channel line or sell short below the lower channel line. I may miss a runaway trend because of this restriction, but my safety is greatly increased.”

Area A—Warning. Prices stab outside +3 ATRs—the uptrend has reached an extreme.
Area B—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions.
Area C—Alert. Decline stopped at −2 ATRs—a sign of bottoming.
Area D—Alert confirmed. Prices holding above −2 ATRs—bottom is being built.
Area E—Buy. False downside breakout reaches −3 ATRs and rejects that low.
Area F—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold.
Area G—Warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold.
Area H—Another warning. Prices stab outside of +3 ATRs—watch whether +2 ATRs will hold.
Area I—Sell. Prices couldn't hold above +2 ATRs—take profits on long positions.

1. Amateurs like to bet on long shots—they tend to buy upside breakouts and short (if they ever sell short) downside breakouts. When an amateur sees a breakout, he expects riches from a major new trend.
2. Professionals, on the other hand, tend to trade against deviations and for a return to normalcy. The pros know that most breakouts are exhaustion moves that are soon aborted. That's why they like to fade breakouts—trade against them, selling short as soon as an upside breakout stalls and buying when a downside breakout starts returning into the range.
3. Breakouts can produce spectacular gains when a major new trend blows out of a channel, but in the long run it pays to trade with the pros. Most breakouts fail and are followed by reversals, which is why channel lines mark attractive zones for entering trades against breakouts, with profit targets in the value zone.
4. When a channel is relatively flat, the market is almost always a good buy near the bottom of its trading channel and a good sell near the top. ('almost always' is an exaggeration, but no doubt the odds are better with a ‘stationary’ channel)

The Manning Stoller system

1. A sell signal is given when prices reach the upper channel line while an indicator, such as MACD-Histogram, traces a bearish divergence. It shows that bulls are becoming weak when prices are overextended.
2. A buy signal is given when prices reach the lower channel line while an indicator traces a bullish divergence. It shows that bears are becoming weak when prices are already low.
3. We must analyze markets in multiple timeframes. Look for buys on the daily charts when prices are rising on the weeklies. Look for shorting opportunities on the dailies when prices are sinking on the weekly charts.
4. Go long near the moving average when the channel is rising, and take profits at the upper channel line. Go short near the MA when the channel is falling, and take profits at the lower channel line.
5. When a channel rises, it pays to trade only from the long side, buying in the value zone which lies between the fast and slow moving averages, and then selling at the upper channel line. When a channel declines, it pays to short in the value zone and cover at the lower channel line. (somehow I’ve never really mastered this. It seems like it should be simple though. I daren't say much more without sounding paranoid.)

1. Elder goes on to combine Impulse system signals with channels

Area A—while prices have reached the lower channel line, a new record low of MACD-Histogram suggests that this low will be retested or exceeded.
Area B—channel line rejected, rally is likely ahead.
Area C—prices reached their upper channel line and recoiled—reversal is likely.
Area D—buy. Prices have reached the lower channel line, while MACD-Histogram has traced out a bullish divergence between bottoms A and D, with a break at C.
Area E—while prices have reached their upper channel line, a new record high of MACD-Histogram suggests that this high is likely to be retested or exceeded.
Area F—pullback to value completed; MACD-Histogram breaks below zero, creating a setup for a possible bearish divergence. Still may buy to ride back to the prior high.
Area G—sell and sell short. Prices have reached the upper channel line, while MACD-Histogram has traced out a bearish divergence between tops E and G, with a break at F.

And if that’s not enough he outlines a Bollinger Band Method, with options, advising that you increase the written options output at band extremes. As I said, a beast of a book!

Also recall the band systems recommended by Kathy Lien - they are worth checking out, and are more thoroughly described than Elder’s somewhat vague advice.

I must also mention again that if you want a true living master of channels to consult, seek out Parisboy in his thread. I think that channels are an important part of guesstimating future risk, but I also must confess to finding them frustratingly unreliable, like any lines on a chart. When prices exit a channel, as Elder says, they can really take off and never return, or they can bounce right back. You never know for sure. Still, they can be part of a low risk/high return strategy.

Next: Elder condemns each of the common trading vehicles in their own way.


You won’t believe what he says about Forex. (or maybe you will)

Trading Vehicles

1. Whatever you trade, make sure it has liquidity, millions of shares per day so you can easily get in and out
2. Volatility - the higher it is the more opportunities
   1. Measure it using ‘beta’. Beta measures volatility against a benchmark like the S&P. If a stock’s beta is 1 then its volatility is the same as the S&P. Start with low beta vehicles, says Elder.

3. Time zones
   1. Trading while sleepy puts you at a disadvantage

4. Experienced traders go long and short, not just long (but often brokers make this difficult or impossible)
5. Elder recommends you check out his latest book The New Sell & Sell Short: How to Take Profits, Cut Losses and Benefit from Price Declines (for someone who claims to not be a guru he has written a suspiciously high number of books and has released new editions for all of them)

Stocks

1. The main problem is there’s too many of them and beginners tend to spread themselves too thin
   1. Too much choice doesn’t improve your prospects as a beginner

2. Stocks can run and gun based on flimsy fundamentals
3. Insiders have a big influence on price
4. Elder has two “pools”
   1. On weekends, Elder runs the 500 component stocks of the S&P 500 through his divergence scanner and zooms in on stocks flagged by that scan, selecting a handful that he considers trading during the coming week.
   2. Second, Elder reviews Spike picks on weekends, figuring that among a dozen top traders submitting their favorite picks, there is bound to be at least one that Elder will want to piggyback.
   3. The number of stocks Elder closely monitors during the week is always in single digits.

ETFs

1. The industry keeps quiet about the fact that there are two ETF markets. The primary market is reserved for “authorized participants”—large broker-dealers who have agreements with the ETF distributors to buy or sell large blocks, consisting of tens of thousands of ETF shares. These middlemen buy at wholesale and then sell to you at retail. You, as a private trader, always sit in the back of the bus—in the secondary market.
2. Elder’s friend theorizes these blocs can also short these ETFs in large lots.
3. Admin expenses dampen returns
4. The more exotic the index tracked by an ETF, the greater your “haircut.”
5. Some ETFs lose value so fast that their issuers repeatedly perform reverse splits in order to raise prices back into double digits. (mainly vix-related)
6. Vix-based ETFs and some commodity ETFs do a poor job of actually tracking their asset prices, especially in times of high volatility.

Options

1. “Options are a hope business. You can buy hope or sell hope. I am a professional—I sell hope. I come to the floor in the morning and find what the public hopes for. Then I price that hope and sell it to them.”
2. Each option has an exercise price (also called strike price). If a stock fails to reach that price before the exercise date, the option expires worthless and the buyer loses what he paid, while the writer keeps his loot, whose polite name is premium.
3. The simplest and easiest approach to options is to buy them. That's exactly what beginners do, and unless they learn quickly and change, their accounts are doomed.
4. This is the standard line of brokerage house propaganda: “Options offer leverage—an ability to control large positions with a small outlay of cash. The entire risk of an option is limited to the price you pay for it. Options allow traders to make money fast when they're right, but if the market reverses, you can walk away and owe nothing!” They fail to mention that in order to profit from buying an option you must be right in three ways. You must choose the right stock, predict the extent of its move, and forecast how fast it'll get there. If you're wrong on even one of these three choices, you'll lose money.
5. Beginners, gamblers, and undercapitalized traders make up the majority of option buyers. Just think of all the money those hapless folks lose in their eagerness to get rich quick.
6. Writing options is a serious game for knowledgeable, disciplined, and well-capitalized traders. If your account is too small for option writing, wait until it grows bigger.
7. Markets are like pumps that suck money out of pockets of the poorly informed majority and into the wallets of a savvy minority. Smart traders in any market look for situations in which the majority does something one way, while a small, moneyed minority does the opposite. Options are a great example of this rule.
8. The risk/reward ratio in naked writing is better than it looks, and there are techniques for reducing the impact of a rare adverse move.
9. Cautious writers close their positions without waiting for the expiration dates. If you write a call at 90 cents and it goes down to 10 cents, it makes sense to buy it back and unwind your position. You've already earned the bulk of potential profit, so why expose yourself to continued risk? It's cheaper to pay another commission, book your profits, and look for another writing opportunity.
10. Time is the enemy of options buyers. Every buyer has lived through this sad sequence: they buy a call, the stock rises, but their option fades to zero, and they lose money. Buyers lose when the underlying security takes longer than expected to get to the level at which they can collect on their bet. Most options become worthless by their expiration date.
11. The sweet spot for an option writer is approximately two to three months from option expiration. That's when time decay starts gathering speed. It accelerates in the last few weeks of the option's life. When you write options close to the expiration, you benefit from faster time decay. You can get more money for options with longer lives, but don't be greedy. The goal of a writer is not to make a killing on any single trade but to grind out steady income.
12. Delta is a tool that shows the probability of the underlying security reaching your option's exercise price by its expiration date.
    1. A cautious option writer should aim to sell calls or puts whose Delta isn't much above 0.10, meaning there is only a 10% chance of the exercise price getting hit before the expiration date. Remember, as an option writer you don't want the underlying security to reach that price: you want to sell empty hopes. If 10% risk seems high, keep in mind that Delta is derived without any reference to market analysis. If your decision is based on good technical analysis, your risk will be lower than what Delta indicates. (speaking of empty hopes )

13. “slicing the bid-ask spread.” Put in a low bid or a high ask and then start giving up a penny at a time until somebody bites. For example, if the bid was $1.18 and the ask $1.30, but he had no intention of selling at $1.18 and paying that huge spread. Instead, he put in his order to sell a large number of contracts at $1.29, a penny cheaper than the ask. No response. A few minutes later he lowered his ask to $1.28—and suddenly a buyer materialized, snapped up his contracts, and then the bid-ask spread went back to $1.18/$1.30. My client finds there are large traders watching from the sidelines, not showing their hand, but willing to trade within the spread. He gets them to bite by giving up a penny at a time.
14. Option writers can get hurt in one of three ways. Some overtrade, creating positions that are too large for their accounts. Assuming too much risk makes them nervous and unable to hold positions through any wiggles. Option writers also get hurt when they fail to run fast enough when an option moves against them. Finally, option writers can get blown out if they don't have a reserve against a major adverse move. The longer you trade, the greater the risk of a catastrophic event.
15. Reduce risk by:
    1. Buying back the option once it reaches 80-50% of its value
    2. Use a mental stop loss on the option you sold; also on the underlying security;
    3. Get out of naked positions before they get into the money
    4. Put 10% of winnings into an account to use to bail yourself out when the inevitable happens

16. Puts are worth buying only if you expect a crash
    1. Avoid puts with more than 2 months of life; if you’re expecting a drawn out bear market better to short the underlying
    2. Look for cheap puts whose price reflects no hope
    3. the strike level at which you would save only a tiny fraction of a put's price shows that all hope has been squeezed out of that put, and it is priced like a cheap lottery ticket. That's the one you want!
    4. Why do this? Because the only time to buy a put is when you're shooting for an exceptional gain from a major reversal.
    5. Most people can't stomach the idea of being wrong three, four, or five times in a row, even if they are likely to make money in the end. That's why so few traders play this game.
    6. Lawrence MacMillan's book Options as a Strategic Investment

CFDs

1. Commissions tend to be high relative to contract sizes. Bid-ask spreads are controlled by CFD issuers, who also control prices of contracts, which may deviate from prices of the underlying securities. In other words, a retail customer plays against a professional team that can move the goal posts during the game.
2. with CFDs you are not just trying to beat the market but the casino too. CFD providers can set whatever prices they like for an instrument, as it is their instrument. The fact that sometimes it emulates what happens in the stock market does not mean it is the same as trading in the stock market.
3. The Australian financial regulator ASIC considers trading CFDs riskier than gambling on horses or in casinos. CFDs are banned in the United States where regulators haven't forgotten the bucket shops that flourished at the turn of the twentieth century. (still banned in the US?) Elder compares the protections of the SEC in this matter to thalidomide’s ban in the USA!

Futures

1. The survival rate for new futures traders is low—nine out of ten newcomers are said to bust out in the first few months. It is important to understand that the danger is not in futures but in a gross lack of risk-management skills among beginners. Futures offer some of the best profit opportunities to serious traders but are deadly for amateurs. You must develop excellent money-management skills
2. Even though most commodities have built-in floors and ceilings, most traders are afraid to trade near those extremes, says Elder
3. On contracts for delivery: Normally, the nearby months are cheaper than the remote ones, and that relationship is called a contango market.
4. Higher prices for more remote deliveries reflect the “cost of carry”—financing, storing, and insuring a commodity.
5. When supply tightens or demand increases, people start paying up for the nearby months, and the premium for the faraway months begins to shrink. Sometimes the front months become more expensive than faraway months—the market becomes inverted! (backwardation)
6. Interest rate futures are always inverted because those who hold cash positions keep collecting interest instead of paying finance and storage charges.
7. Professionals don't wait for inversions—they monitor the narrowing or widening of premiums. A good speculator can rattle off the latest prices, but a floor trader will quote you the latest premiums. A savvy trader knows by heart the normal spreads between different delivery months.
8. Hedgers tend to dominate the short side of the markets, most speculators are perpetual bulls, but floor traders love to trade spreads. Spreading means buying one delivery month and selling another in the same market. It also means going long one market while shorting a related one.
9. Spread trading is safer than directional trading and has lower margin requirements. Amateurs do not understand spreads and have little interest in these reliable but slow-moving trades. There is not a single book on spreads I can recommend, a sign of how well professionals have sown up this area of knowledge and kept the outsiders out. This is one of a handful of niches in the markets where professionals are earning high incomes without the benefit of a single good how-to book. (still?)
10. The hedgers are today's smart money, but understanding their positions isn't as easy as it seems.
    1. a COT report may show that in a certain market, hedgers hold 70% of shorts. A beginner who thinks this is bearish may be completely off the mark if he doesn't know that normally hedgers hold 90% of shorts in that market, making the 70% stance wildly bullish. Savvy COT analysts compare current positions to historical norms and look for situations where hedgers, or the smart money, and small traders, many of whom are gamblers, are dead set against each other.

11. Easy margin is a double-edged sword (leverage)

Forex

1. Most beginners open accounts at forex shops where they immediately run into a fatal flaw—your broker is your enemy. (After what happened to me last week I’m afraid I have never been more in agreement. As I've said before the greatest risk in Forex is Broker Risk.)
2. When you trade stocks, futures, or options, your broker is your agent: he executes your trades for a fee, and that's the end of it. Not so in most forex (as well as CFD) houses, where your broker is likely to take the opposite side of every trade. You and the forex house are now against each other: if you lose, your broker will profit, and if you win, he'll lose. Since the house holds most of the cards, it has many ways to achieve the desired result.
3. Most forex houses “bucket” customer orders—accept them without executing any trades. They charge spreads, commissions, interest, etc. for non-existent trades. (Does this guarantee failure? In theory no, especially if the broker isn't actually making up outrageously divergent prices from the actual market)
4. That forex house accepts any trade in any currency pair, whether long or short, but always shifts the bid-ask spread to put itself at an advantage from the get-go. Those so-called “trades” never go anywhere—they're only kept as electronic entries in the firm's books. The forex house charges interest if its customers take their phantom “positions” overnight, even though there is never any position, since the house simply holds the opposite side of each trade. The only time the firm goes to the legitimate market is when multiple client orders cluster on the same side of the same currency pair in excess of a million dollars—that's when the house hedges its own exposure in the real market.
5. When you trade stocks, options, or futures, your broker buys or sells on your behalf, earning a commission for this service; your success or failure is not their primary concern. Forex houses want you to lose. (Even so-called ‘honest’ brokers like Global Prime who blame everything on their liquidity provider, but is basically their business partner if not their owner in spirit)
6. “The market has long been plagued by swindlers preying on the gullible,” according to The New York Times. “The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records,” writes The Wall Street Journal. (At least I can say I'm above average in this way. )
7. Frauds may include churning customer accounts, selling useless software, improperly managing “managed accounts,” false advertising, and Ponzi schemes. All the while, promoters claim that trading foreign exchange is a road to profits. (but this can be true of any market)
8. The real forex market is a zero sum game, in which well-capitalized professional traders, many of whom work for banks, devote full-time attention to trading. An inexperienced retail trader has a significant information disadvantage. The retail trader always pays the bid-ask spread, which lowers his odds of winning. Retail forex traders are almost always undercapitalized and subject to the problem of “gambler's ruin.” Even in a fair game between two players, the one with the lower amount of capital has a higher probability of going bust in the long run. (but again you could say this about nearly any market except the ones that put up barriers to entry for the poors. So is forex evil because it is more democratic? Not necessarily.)
9. Elder’s millionaire friend could tell when his orders were bucketed because he’d put them into the system and there would be no response on the charts
10. Elder says: “I enjoy trading currencies, but wouldn't go near a forex house. Instead, I trade electronic currency futures. That's what I recommend to anyone interested in trading foreign exchange. Futures brokers work for you, not against you; futures spreads are more narrow, commissions more reasonable, and no interest is charged for the privilege of holding a position. There are contracts for most major currency pairs and even mini-contracts for euro/dollar and yen/dollar.”
11. The 24/6 conundrum - the moves happen while you sleep (but with automation this could be a benefit?) major financial centres ‘pass the book’ onto the next session London manages the book and then hands off to New York, etc.
12. Currencies follow the sun, and small traders can't keep up with it. If you trade currencies, you either need to take a very long-term view and ignore daily fluctuations, or else day-trade and avoid overnight positions. (or use computers)

Discouraged? So am I. Lately I have been wondering if the forex game is even worth the trouble. With what I know and the tools I have at my disposal I suspect I can do much better in other markets. At the same time I don’t want to give up, and I definitely don’t want to move on to other markets until I can definitely say "the game is rigged so that success is impossible". I can’t yet say that.

Getting played feels bad man, but being the guy who got close to success and then turned around would feel worse.

I am working on a project with Kefada that, if it works, theoretically can solve many of the problems inherent with forex trading. In fact it was designed to benefit from the few advantages that Forex offers, among them easy long/short orders, over long trends that never get stuck limit down/up. I will definitely report back on the results when appropriate.

This won’t solve dishonesty in forex broker behaviour, and outrageous spreads, swaps, commissions and slippage, however. If the industry is having trouble attracting new suckers maybe it needs to look inward to offer a better deal. Your thoughts on this are welcome and encouraged.

Sorry about the big data dump, but I wanted to get as caught up on my notes as possible before taking a hiatus. I want to devote my full energy to this new project because I believe it has a lot of potential.
This gets us to the end of Part 8 but this book still has

1. Part 9: Risk Management
2. Part 10: Practical Details (profit target and stop setting, avoiding wishful thinking, and scanning for trades)
3. Part 11: Record-keeping

Despite the length, the book seems to be quite worth the time, even if I don’t agree with everything in Elder’s methodology.

Dear readers, thank you for journeying with me. If you read through this whole thread and can take advantage of some part of it, I’m sure you are equipped for success (if not from the actual info then from an ability to persevere). If I can return with some good news I definitely will, and if not, I may still complete the third book poll list, but probably without a Forex focus, but a stocks/futures focus. Your feedback will influence my decision.

This thread has been a pleasure to follow and a valuable resource. I'm certain that many have benefited from the information and appreciate the work you've put in! Widening focus to other asset classes can only improve overall trading ability imho. Personally, I'd be interested in futures, commodities, and crypto.

Good luck with your project - hope to see you back here soon